Customers struggling with managing systems able to handle the scale and power needs of soaring generative AI and cloud operations is fueling the deal.
Nokia has announced a $2.3 billion deal to acquire Infinera, a San Jose, Calif.-based firm specializing in optical networking and optical semiconductors, in the hope of increasing its North American customer base.
The acquisition will “strengthen the company’s technology leadership in optical and increase exposure to webscale customers, the fastest growing segment of the market,” Nokia said in a statement announcing the deal on Friday. “This transaction, along with the recently announced sale of Submarine Networks, will create a reshaped network infrastructure built on three strong pillars of fixed networks, IP networks and optical networks,” the Finnish company said.
Analysts were cautiously optimistic. Multi-billion-dollar acquisitions have a mixed history of success, usually due to company culture conflicts. The pattern is typically that the larger acquiring firm admits that it needs help in an area and then acquires a firm that is an expert in that space. But then the acquiring company often tries to reshape the acquired firm to the parent company’s culture, which undermines the whole point of the acquisition.
Ajeet Das, director of network infrastructure for market analyst IDC, said that although the history of similar acquisitions is sobering, he thinks that this one may do well.
First, he pointed to both companies having “minimal product overlap.”
Efficiency
Due to the extreme data and power demands of generative AI and cloud environments — demands that are expected to soar over the next few years — Das sees many of the largest enterprises needing options beyond what they have today. Das is particularly concerned about power consumption: Optical communication consumes a lot of power, he said, but “Infinera has products that are far more efficient in terms of power consumption.”
“For Nokia to really make a difference in the optical networking area, they need the scale and a footprint in the data center,” Das said. “Nokia is pretty strong with routers and switches whereas Infinera is strong on optical product. And the enterprise absolutely needs both.”
Richard Kramer, managing director at Arete Research in London, tracks Nokia’s financial performance. He said that some of Nokia’s return on investment from this deal will be impacted by what firm customer contracts Infinera is bringing to Nokia.
“It will really depend on whether [Infinera] has hyperscale deals locked up with new products,” Kramer said.
Nokia is offering to pay Infinera shareholders a premium of 28% over Infinera’s share price at the close of business on June 26, and a 37% premium over the average price over the last six months, with at least 70% of the consideration paid in cash. Nokia’s board of directors has said it will accelerate Nokia’s share buyback program to offset the dilution from the deal.
In a statement, Nokia said, “Infinera has built a solid presence in the North America optical market, representing ~60% of its sales, which will improve Nokia’s optical scale in the region and complement Nokia’s strong positions in APAC, EMEA and Latin America.” Nokia’s statement pointed out that even the combined company will not have a strong position in China, which is an ongoing concern with US officials.
“Internet content providers — ICP or webscale as Nokia typically calls this segment — make up more than 30% of Infinera’s sales. With recent wins in line systems and pluggables, Infinera is well established in this fast-growing market,” the Nokia statement said. “Infinera has also recently been developing high-speed and low-power optical components for use in intra-data center (ICE-D) applications and that are particularly suited to AI workloads, which can become a very attractive long-term growth opportunity. Overall, the acquisition offers an opportunity for a step change in Nokia’s penetration into webscale customers.”
Nokia plans to close the deal in the first half of 2025, subject to approval from Infinera shareholders and various regulators.
