Nokia’s (NOK) planned $2.3 billion acquisition of U.S. optical-networking equipment maker Infinera puts it on track to benefit from the billions of dollars of investment being poured into data centers to keep up with the rise of artificial intelligence.
The deal would see Nokia overtake Ciena to become the second-largest vendor in the optical-networks market, with a 20% share, behind Huawei, which has benefited from a very low presence of Western companies in China.
Telecommunications equipment makers struggling with declining sales of 5G equipment are looking for ways to diversify their market and enter growth areas such as AI.
Nokia’s move will enable the company to sell more equipment to big tech companies such as Amazon, Alphabet and Microsoft as they invest billions of dollars in building new data centers to keep up with the artificial intelligence boom.
“The timing is very optimal for this type of transaction, coming just before we expect markets to start to recover,” Nokia Chief Executive Officer Pekka Lundmark told Reuters in an interview.
AI is a major driver of investment
“AI is driving significant investment in data centers, so one of the big attractions of this acquisition is that it significantly increases our exposure to data centers,” he said.
Data centers use optical transport networks, which are glass cables that carry digital signals, allowing electronic devices to communicate with each other.
Infinera has a particular strength in intra-data center communications, which refers to communications between servers inside a data center, and which Lundmark said will be one of the fastest growing segments of the entire communications technology market.
Nokia shares rose 4% in morning trading, a sign shareholders are bullish on the deal, which typically sees the buyer’s share price fall due to dilution in a cash-and-stock deal.
Nokia will pay 70 percent of the purchase price in cash and the rest in stock and expects to achieve cost savings of 200 million euros ($213.88 million) once the acquisition closes next year.
Infinera’s growth trajectory has been shaky so the acquisition multiple may be a little high, but the price would be justified if Nokia can unlock 200 million euros of synergies, said Mads Roosendaal, an analyst at Danske Bank Credit Research.
About 60 percent of Infinera’s business comes from the United States, but Nokia has a larger share in Europe and Asia, making it a complementary deal, Lundmark said.
“For both businesses combined, cost of sales is over 2 billion euros and operating expenses are over 1 billion euros, so 200 million euros is not a huge amount against this target,” Lundmark said, adding that it was too early to comment on possible job cuts.
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(1 dollar = 0.9351 euros)
(Reporting by Spanta Mukherjee in Stockholm; Editing by Ross Russell)