Huawei Technology Co Ltd (SHE:002502) expressed interest in acquiring Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) earlier this week, although it then clarified that an acquisition isn’t pending or even coming up in the foreseeable future. But what would happen if the two companies did embark on a merger? Leave it to analysts to consider the possibility, even though they don’t seem to be in talks to make it happen.

Nokia

Credit Suisse and Bank of America Merrill Lynch both issued reports considering what can and might happen if a merger were to be seriously considered by the two companies.

The Benefits Of A Nokia – Huawei Merger

Of course any merger has potential benefits that could be reaped by one or both parties. In the case of Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) deciding to merge with Huawei Technology Co Ltd (SHE:002502), there is obvious benefit for both. Huawei wants to increase its position in the smartphone market, while Nokia is struggling just to survive.

A team of BAML analysts let by Didier Scemama said that a merger between the two companies would bring Nokia’s strong patent portfolio, which contains 30,000 patents. It also would bring the company’s “emerging markets distribution, hardware design capabilities and solid carrier relationships globally.” Huawei would bring its scale, low cost structure and healthy balance sheet into the mix. Sounds like a winning team, right? Perhaps not.

Problems With Regulators

Both BAML analysts and the team of analysts at Credit Suisse point out some problems the merger would have with regulators. When combining Nokia Siemens Networks with Huawei’s network, the new company would have more than a 30 percent share of the global wireless infrastructure. The result might have to be a separation through an initial public offering.

Scemama said the Department of Justice might even completely bar Huawei Technology Co Ltd (SHE:002502)’s acquisition of Nokia Siemens Networks because of the company’s exposure to U.S. carriers. Such an acquisition might be considered a threat to U.S. national security.

Possibilities For Nokia Siemens Networks

BAML analysts said one possibility would be for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) to sell just its handset business to Huawei, leaving it to focus on the Nokia Siemens Network and its wireless infrastructure. They note that the infrastructure business is more stable and that Nokia would have the cash to purchase Siemens’ 50 percent stake in the joint venture if it sold its handset business.

Siemens has apparently been looking for a buyer for its share of NSN. It has reportedly been considering various private-equity firms like The Blackstone Group L.P. (NYSE:BX), TPG or KKR. If Nokia could purchase the other half of the partnership, then it could a big positive for the company.

Potential Funding Issues With A Nokia – Huawei Merger

There are also several other barriers the two companies could face in terms of a merger. Credit Suisse analysts say funding could be a problem for Huawei because it had gross cash of $11.5 billion and $3.3 billion in debt as of the end of last year. So if it did acquire Nokia, it would probably need an outside source of funds, possibly a reverse initial public offering.

In addition, they believe that Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) may have some contingencies for their Windows Phone partnership in terms of a change of control. The analysts estimate there could be more than €900 million in support payments that could be recalled if there was a change of control.

Possible Opposition To A Nokia Acquisition

BAML analysts also point to possible opposition from the Finnish government because of the negative impact it might have on the nation’s economy in terms of job cuts. They said the European Union might also oppose a merger between the two companies because Nokia does make significant contributions to research and development in Europe, and the EU might not want a Chinese company to have access to that kind of information.

They also note that if Huawei should acquire Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) and transition it away from the Windows and onto the Android platform, it might result in “substantial market share loss and disruption to the operations.” As such, the merger would be “less attractive,” in their view.