Supanta Mukherjee
STOCKHOLM (Reuters) – Nokia’s (HE:) offer to buy U.S. optical networking equipment maker Infinera (NASDAQ:) for $2.3 billion gives the Finnish company the opportunity to benefit from billions of dollars of investment in data centers to boost artificial intelligence.
The deal will help Nokia make a leap Sienna (NYSE:) and become the second largest supplier in the optical network market with a 20% share after Huawei, which benefits from the minimal presence of Western companies in China.
Telecom equipment makers, struggling with falling sales of 5G equipment, are looking for ways to diversify their markets and move into emerging areas such as artificial intelligence.
Nokia’s move will allow the company to sell more hardware to major tech companies such as Amazon (NASDAQ:), Alphabet (NASDAQ:) and Microsoft (NASDAQ:) as they invest billions of dollars to build new data centers to service the artificial intelligence boom. .
“This is a pretty optimal time for a deal of this nature if you are planning it just before the market is expected to start to recover,” Nokia CEO Pekka Lundmark told Reuters in an interview.
“AI is driving significant investment in data centers… one of the key features of this acquisition is that it significantly increases our presence in data centers,” he said.
Data centers use optical transport networks—glass cables that carry digital signals—to allow electronic devices to communicate with each other.
Infinera is particularly strong in intra-center communications, that is, server-to-server communications within data centers. According to Lundmark, this will be one of the fastest growing segments in the overall communications technology market.
Nokia shares rose 4% in morning trading, signaling shareholders are optimistic about the deal. Buyers’ stock prices typically decline due to the dilution of the cash-stock transaction.
Nokia, which will pay 70% of the purchase price in cash and the rest in shares, expects to save 200 million euros ($213.88 million) in costs when the deal closes next year.
While the purchase multiple may be a bit steep because Infinera has had an uneven growth trajectory, if Nokia could capture 200 million euros in synergies then the purchase price would be justified, said Mads Rosendahl, an analyst at Danske Bank Credit Research.
Infinera gets about 60% of its business from the U.S., while Nokia has a larger stake in Europe and Asia, making the deal complementary, Lundmark said.
“The combined cost of sales of these two businesses exceeds 2 billion euros, and operating expenses are more than a billion euros… so compared to this target, 200 million (euros) is not much,” Lundmark said, adding that it it was too early to comment on possible layoffs.
($1 = 0.9351 euro)