Nokia-Siemens Divisions to Merge as Market Continues Consolidation

Responding to the proliferation of services and products built on Internet Protocol, as well as to increasing competition from Asian equipment makers, Nokia and Siemens on Monday said they will merge the Networks Business Group of Nokia and the carrier-related operations of Siemens into a new company.

The 50-50 joint venture will be called Nokia Siemens Networks. Simon Beresford-Wylie, currently executive vice president and general manager of networks at Nokia, will become CEO as soon as the merger closes. Peter Schönhofer, a member of the Siemens AG Austria executive board, will assume the position of CFO. Siemens and Nokia executives said at a press conference on Monday they will be announcing additional leaders in the coming weeks. The transaction is expected to close before January 2007.

Nokia Siemens Networks combines Nokia’s wireless expertise with Siemens’ work in the wireline business. The company initially will place third behind recently merged rivals Alcatel and Lucent, and Ericsson and Marconi. Klaus Kleinfeld, CEO of Siemens, said he would like to see the new company to move up to second place in the overall telecom equipment market. The Nokia-Siemens deal, he noted, creates a “new industry powerhouse” that will “change the face of the whole industry” thanks to fixed-mobile convergence driven by IP.

Industry reports put the new company’s revenue at approximately $20 billion annually.

Analysts and ratings companies were generally positive about the continued consolidation in the telecom equipment market. Michael Howard, principal analyst and co-founder of Infonetics Research, said profitability and lower operations costs ultimately will determine the merger’s success. “The final proof of a good merger is a profitable, still-standing business five years from now,” he said.

Nokia and Siemens executives said they are heading into the venture cash-flow positive and that the only losses will come from restructuring costs. The companies expect to start with 60,000 employees, but admitted there will be job cuts of 10-15 percent. Kleinfeld said Nokia Siemens Networks will be looking for ways “to fully redeploy as many people as we can, but [job cuts are] the fact of the matter.”

Ratings service Standard & Poor’s said Nokia’s ratings remained unaffected by the merger announcement. “[T]he transaction has a sound rationale in an environment characterized by carrier consolidation and fierce competition,” the service said in a news release. “The new group will benefit from an expanded product portfolio and geographic presence and is likely to be better prepared to deal with the convergence of mobile and fixed-line technologies.”

Infonetics analyst Jeff Heynen agreed. “As network operators converge their wireline and wireless networks to more efficiently deliver voice, data and video services, manufacturers have to join forces to create the scale and expertise necessary to provide end-to-end support. What this joint venture brings is experience and success in both wired and wireless networks. More importantly, for the world's largest operators, it gives them one throat to choke when the inevitable problems arise.”

“A Siemens-Nokia partnership looks to be a genuine symbiosis, without too much overlap,” added Infonetics analyst Richard Webb. “In our tracking of the radio access network equipment market, Nokia is definitely A-list, especially in the 3G segment, and combining this with the strength of Siemens in long-haul, core- and edge-fixed networks will create a carrier network heavyweight that could be more than the sum of its parts, a case of 2+2=5.

Nokia Siemens Networks will offer its carrier customers products and services including IMS, 2G GSM/EDGE access, 3G WCDMA/HSDPA access, extensive mobile core, fixed broadband, transport, IPTV, LTE, WiMAX and low-cost mobile voice products for emerging operators.

The new company will locate its operational headquarters in Helsinki, Finland, and have regional headquarters in Munich, Germany, where three of the five future divisions of the new company will be based.

Infonetics Research www.infonetics.com
Nokia www.nokia.com
Siemens www.siemens.com

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