Nokia, Siemens in Multi-Billion-Dollar Networks Unit Merger

Nokia and Siemens have agreed a joint venture operation for their communications service provider businesses. The move will create one of the largest global players in the telecoms infrastructure sphere, with a distinct expertise in FMC. The deal - valued at a reported US$31.6 billion by the Wall Street Journal - combines Nokia's Networks Business Group and Siemens' carrier-related operations for fixed and mobile networks to form Nokia Siemens Networks, with 2005 pro forma revenues of 15.8 billion euro (US$19.9 billion). "This combination creates a leading industry player with immediate strength, excellent potential for growth and [one that is] well-positioned to improve future profitability," said Siemens CEO Klaus Kleinfeld

Nokia Siemens Networks joins the likes of Cisco and the new Alcatel-Lucent partnership at the top of the networks infrastructure business. Nokia and Siemens said that they plan to achieve cost synergies of up to 1.5 billion euro annually by 2010, potentially leading to job cuts of up to 15%. The former head of Nokia's Networks Business Group, Simon Beresford-Wylie, will head the new company, which is to be headquartered in Finland (see World: 3 April 2006: Alcatel, Lucent Not So Equal in Merger and 24 March 2006: Alcatel and Lucent Confirm Merger Talks).

Outlook and Implications

• FMC: The biggest asset of the new company is its leading position in FMC products and services. Given the pedigree of its constituent partners - Nokia's mobile know-how and Siemens fixed and mobile expertise - Nokia Siemens Networks has a distinct expertise in FMC that gives it expansive advantages for leading triple-play and quadruple-play activities globally. "The communications industry is converging, and a strong and independent Nokia Siemens Networks will be ideally positioned to help customers lower costs and grow revenue while managing the challenges of converging technology," said Olli-Pekka Kallasvuo, the chief executive of Nokia and chairman of Nokia Siemens Networks.

• Buoyant vs Struggling Business: While Nokia's Network Business Group has managed to hold its own in the wireless equipment market, Siemens' Com business has struggled over the years. Siemens last month reported a 75% drop in operating profit for its second quarter, in the year ending September 2006 (see Germany: 1 May 2006: Siemens Eyes Cut 1,000 Job Cuts at German Com Unit). It had already offloaded its loss-making mobile handset unit to Taiwan's BenQ. In April 2006, Motorola attempted to acquire the mobile equipment unit of Com, but was rebuffed by Siemens’ insistence to sell both its profitable mobile equipment business and struggling fixed equipment unit together. (see World: 18 April 2006: Motorola Eyes Siemens Loss-Making Com Unitand 8 June 2005: Siemens Offloads Handset Division to BenQ).

• Who is Next?: With Nokia finally getting involved in mergers and acquisitions (M&A), the anticipated consolidation of the telecoms equipment market has arrived. Under its former boss, Nokia grew organically - accruing a cash pot of about 9 billion euro by March 2006. However, Kallasvuo has indicated that his management will pursue M&A opportunities to strengthen Nokia's position in an increasingly complex business environment. Expectedly, Nokia's latest merger with Siemens will re-invigorate the debate about consolidation, and the need for fewer players in the market. Nortel, Juniper and Ericsson have all been cited as potential players in an M&A deal (see World: 2 June 2006: New CEO Set to Expand Nokia Further and 20 April 2006: Juniper Q1 Sales Rise 26%, Misses Profit Target).