June 20, 2006

Nokia Corp. and Siemens AG struck a deal to combine Nokia’s Networks Business Group with Siemens’ fixed and mobile networks operations.

The new deal creates a 50-50 joint venture to be called Nokia Siemens Networks.

The companies noted that their infrastructure businesses currently generate a combined $20 billion in revenue annually.

The companies said they expect the venture to produce costs synergies of $1.9 billion by 2010. Approval of the joint venture is expected by the end of this year, with some 60,000 employees working for the new company. Over the next four years, the companies said they would likely cut about 9,000 jobs out of the combined operations.

The move places both Siemens and Nokia in a stronger position to compete with Swedish powerhouse L.M. Ericsson, the world’s largest telecommunications infrastructure company. The companies said that based on current market share data, Nokia Siemens Networks will be the second largest company in mobile infrastructure behind Ericsson.

“This joint venture is an important step to strengthen our position in the market sustainably and to enable us to offer the best state of the art converged technologies and services to our customers,” stated Klaus Kleinfled, chief executive officer of Siemens.

“This combination creates a leading industry player with immediate strength, excellent potential for growth and well-positioned to improve future profitability.”

Simon Beresford-Wylie, executive vice president and general manager of Nokia Networks, is set to serve as CEO of Nokia Siemens Networks. Peter Schonhofer, currently a member of Siemen’s executive board, will take on chief financial officer duties after the closing.

The new company will be headquartered in Helsinki, Finland, but it will have regional headquarters in Munich, Germany, where three of five of its future divisions will be based.

Nokia is the world’s largest cell phone maker, but the company’s infrastructure business has long been somewhat of a sore spot in the company’s overall financial position. Siemens used to sell mobile phones, but offloaded that business to Taiwanese manufacturer Ben Corp.

The Nokia-Siemens deal adds to the growing list of consolidations within the crowded wireless infrastructure market.

In April, Alcatel Inc. agreed to a $13.4 billion stock swap to acquire Lucent Technologies Inc., and last October, Ericsson spent $2 billion to buy Marconi Corp.’s broadband and telecom assets.

In the increasingly competitive wireless infrastructure sector, intense pricing wars are part of the drive behind vendor consolidations. Chinese vendors Huawei Technologies Co. Ltd. and ZTE Corp. are each gaining market share by offering lower-cost wireless infrastructure products to carriers anxious to cut costs.

In response, traditional vendors like Ericsson are touting their in-depth network knowledge while also working to grow their managed services divisions and continue developing innovative products.

Analysts seemed to view the Nokia-Siemens transaction favorably, with Bear Stearns pointing out that the combined company gives Nokia instant access to a wireline portfolio.

However, the firm said executing headcount reductions could prove to be a challenge for the joint venture since Siemens has held its employee base in Communications constant despite the segment’s financial struggles.

But considering the industry-wide ramifications, Bear Stearns said, “This creates a stronger competitor in wireless, but removes an aggressive player in terms of pricing and helps the industry cope with overcapacity.”

CIBC World Markets said much of the same, stating that it expects positives for Nokia as it turns into a leading supplier for both wireless and wireline infrastructure gear, also noting that, “We would expect added pressure on both Motorola and Nortel to step up their networking operations to risk being marginalized.”

UBS Investment Research said, “We believe this is a good way for Nokia to gain scale on the infrastructure side without having to pay dearly for it.”

Source: RCR News