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Investors push shares of Infinera (INFN +17%) toward one-year highs today following Nokia's (NOK +1%) agreement to purchase the company for $6.65 per share, or around $2.3 bln, representing a roughly +26% premium over INFN's closing price yesterday of $5.26. NOK agreed to at least 70% of the purchase price being financed with cash, with the remainder stemming from stock. However, NOK's board committed to increasing its repurchase plan to mitigate stockholder dilution. NOK anticipates the acquisition to be accretive to its comparable EPS in the first year following closure, expected by the first half of 2025. By 2027, NOK projected over 10% comparable EPS accretion.

While not acting as strongly, NOK investors are also liking the deal. The price tag is reasonable at approximately 7.5x EBIT when incorporating €200 million of target synergies. Furthermore, a merger between the two firms can produce several benefits for NOK, which has endured a lengthy battle with macroeconomic and competitive headwinds.

• INFN and NOK operate in the networking equipment market, a highly fragmented industry led by Huawei, Cisco (CSCO), and Ciena (CIEN). Within this industry, NOK and INFN believe that scale and vertical integration are keys to success and the best way forward to fully support the increasing demand for new AI workloads.
• Adding INFN fortifies NOK's geographical footprint. Over 70% of NOK's annual sales emanate from Europe, EMEA, Latin America, and Asia Pacific, with just around 20% coming from the lucrative U.S. market. Conversely, INFN's U.S. sales stand at around 60%, significantly strengthening NOK's global presence in the optical markets.
• Over the past few quarters, NOK and INFN have not just been competing with rivals but also with an unfavorable macroeconomic landscape. The optical market has stayed soft since around the second half of 2023 and has yet to escape stagnation thus far in 2024. However, NOK anticipates a return to growth in 2025, as the need to invest in optimal transport remains elevated due to AI and cloud workflows. As a result, now may be the best time to begin integrating and fully capitalize on potentially explosive growth over the next several years.

With INFN trading modestly below NOK's purchase price, the market could be wary of possible counterbids from bigger fish in the networking equipment industry. While this is not off the table, it seems somewhat unlikely given regulatory issues in the U.S., as CSCO and CIEN each have formidable domestic presences, which could be seen as anticompetitive by regulators if they were to try to scoop up INFN.

Overall, the combination of NOK and INFN makes sense. The networking equipment market may be currently encountering a lull period. However, most in the industry, including NOK, INFN, CIEN, and CSCO, anticipate a return to growth in 2025, generating urgency for NOK to act swiftly to extract as much as possible from an expected AI and cloud-related boom.