Nokia is taking a bigger step into software with plans for a €347 million ($371 million) cash takeover of OSS specialist Comptel.
The Finnish vendor described the takeover move as critical to its strategy of building up a "significant" standalone software business, announced during Nokia's Capital Markets Day in November last year. (See Nokia to Create Standalone Software Biz, Target New Verticals and Nokia's New Software Unit to 'Redesign' Company.)
With its mainstream equipment business in decline, Nokia Corp. (NYSE: NOK) is looking to software and expansion into new enterprise markets for growth, but it is likely to run into competition from big rivals Huawei Technologies Co. Ltd.and Ericsson AB (Nasdaq: ERIC) in these areas. (Ericsson has been building up its own telecom software business for a few years through a series of strategic acquisitions.)
Comptel, which is also based in Finland, evidently holds appeal because of its focus on telco back-office systems at a time when service providers are under growing pressure to "digitalize" their businesses. Nokia says an acquisition will give it important service orchestration capabilities that it can marry with its own service assurance products.
The move is not altogether surprising given that Comptel Corp. (Nasdaq, Helsinki: CTL1V) is a long-term partner of Nokia, although this also raises questions about how transformative the deal will really be.
While Comptel is said to process "20% of the world's mobile usage data every day," it generated only €98 million ($105 million) in revenues in 2015 and about €8.5 million ($9.1 million) in operating profit.
That is less than half a percent of Nokia's sales last year and only 6.5% of revenues at Nokia's applications and analytics business -- formerly a part of Alcatel-Lucent, which Nokia acquired in a €15.6 billion ($16.7 billion, at today's exchange rate) deal last year, and now responsible for software services and development within Nokia.
Nor does Comptel look highly efficient. Nokia wants its standalone software business to have the "margin profile" of a large software company, but Comptel's operating margin of 8.7% is less than Nokia's 9.1% -- software giantMicrosoft Corp. (Nasdaq: MSFT) reported an operating margin of 19.4% in its last fiscal year, for comparison. Moreover, its 800 employees mean Comptel is making just €122,500 ($131,000) annually per worker, compared with €251,000 ($268,432) at Nokia.
Nokia is also paying a generous fee for the Comptel business -- more than 3.5 times its annual sales and 28.8% more than Comptel's share price at close of business on Wednesday.
Comptel's share price has soared in Helsinki this morning on news of the takeover and was trading up 30% at €3.08, slightly higher than Nokia's bid price of €3.04 in cash.
Nokia's own share price was up more than 1% in Helsinki this morning at €4.61, indicating that investors have reacted positively to the move, even if they do not believe it will be as critical as Nokia makes out.
Nokia's stock has lost about 11.6% of its value during the past year due to concerns about the outlook in the telecom equipment market.
Expounding on the deal, Nokia said it would be able to provide "end-to-end" orchestration of NFV and SDN deployments by combining Comptel's service orchestration capabilities with its own Cloudband and Nuage products.
A number of operators have been investing in NFV and SDN technology in an effort to improve efficiency and gain the service-related flexibility that is typically associated with the likes of Google (Nasdaq: GOOG) and Amazon.com Inc.(Nasdaq: AMZN).
Some activity has stalled, however, due largely to concerns about the interoperability of SDN and NFV equipment from different vendors.
Addressing those concerns may be key if Nokia is to make a real success of the Comptel acquisition.
"The timing of the Comptel purchase is important as our customers are changing he way they build and operate their networks," said Bhaskar Gorti, the president of Nokia's applications and analytics business group, in acompany statement. "They are turning to software to provide more intelligence, automate more of their operations and realize the efficiency gains that virtualization promises."
"We want to help them by offering one of the industry's broadest and most advanced portfolios," added Gorti. "Comptel helps us do that."
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