Nokia is in talks to buy smaller telecom equipment maker Alcatel-Lucent, a deal combining the industry's two weakest players that is backed by the French government but could pose challenges in cutting costs.
In a joint announcement, the Finnish and French companies said they were in "advanced discussions" on a "full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent". The two, which have been seen as a possible combination for the last several years, cautioned that the discussions could still fall apart.
Shares in Alcatel, a group worth about 11 billion euros based on Monday's closing share price, rose about 16 percent. Shares in Nokia, worth about 29 billion euros, fell as much as 7 percent in morning trade before paring back losses to end down 3.6 percent. France's Le Monde newspaper reported that a further announcement could come as early as Wednesday.
The pair are a good fit in terms of products and geographies, and bulking up would help them cut costs as they try to compete with mobile market leader Sweden's Ericsson and low-cost powerhouse China's Huawei.
But the track record of mergers in the industry is spotty, in part because of the difficulties of cutting costs in a R&D intensive business where companies cannot simply drop products that global telecom operators rely on.
The last round, which gave birth to Alcatel-Lucent and combined Nokia's networks business with Siemens about a decade ago, saw both firms lose value and market share as rivals went on the attack while they were busy integrating the businesses.
By Jussi Rosendahl and Leila Abboud. Additional reporting by Sven Nordenstam in Stockholm, Andrew Callus, Matthieu Protard and Jean Baptiste Vey in Paris and Sudip Kar-Gupta and Sophie Sassard in London; Editing by Sophie Walker and Philippa Fletcher
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