As the idea of a combined Alcatel Inc. and Lucent Technologies Inc. settles in, Nokia Corp. and Siemens AG skated into the wireless infrastructure marketplace with plans to combine Nokia’s Networks Business Group with Siemens’ fixed and mobile networks operations. The 50-50 joint venture is to be called Nokia Siemens Networks.
By the end of last week the dust had already settled on the idea of Nokia Siemens Networks, and the only buzz to be heard centered on the fate of the un-consolidated, namely Nortel Networks Ltd. and Motorola Inc.
“We would expect added pressure on both Motorola and Nortel to step up their networking operations or risk being marginalized,” stated CIBC World Markets.
While analysts expect Motorola and Nortel to join forces, the industry is ripe with differing views.
Mercer Management Consulting’s Reuben Chaudhury, a Communications Group director, commented that the three-horse race between Ericsson/Marconi, Lucent/Alcatel and Nokia/Siemens puts a lot of pressure on Nortel and Motorola to do something, but he said he doesn’t see Motorola making any large acquisitions, particularly on the wireless side. But Nortel’s next move is anyone’s guess, according to Chaudhury.
“Nortel could be interested in Siemens’ Enterprise division, or possibly even Motorola. Although the likeliest merger scenario for Nortel is probably with Japanese vendors NEC (Corp.) or Fujitsu. Any discussions with Chinese vendors, like Huawei (Technologies Co. Ltd.) or ZTE (Corp.), are likely exploring alliances rather than mergers, because the Chinese vendors will shy away from a large-scale merger-their focus is on Europe. Huawei especially has a slew of operational challenges as they grow by 40 percent annually, which keeps management pretty preoccupied-they don’t need a distraction.
“The prime candidates for a merger with Nortel are Fujitsu and NEC. And they may not end up with an outright acquisition, they may end up with more of an alliance, or a series of alliances. But standing alone would be very difficult to sustain.”
Regarding Motorola’s options, Merrill Lynch analyst Tal Liani disagrees with Chaudhury’s assessment of Motorola’s next move, saying Chicago-based Motorola may look to buy or merge with its neighbor Tellabs, which has found success in the fiber-to-the-home business with landline phone companies like Verizon Communications Inc. and BellSouth Corp. Liani pointed out that a combined Motorola/Tellabs deal would boost Motorola’s position in that sector and make sense from a financial and product standpoint.
Technology Business Research Inc. added yet another vendor to the list of those likely to make a quick move.
“The Nokia/Siemens joint venture also puts more pressure on Cisco (Systems Inc.), which is further distanced from the service provider market,” said TBR. “Although Cisco’s acquisition strategy does not include mega-mergers, the company has to be considering the remaining options of merging with Motorola or Nortel in order to create a sustainable position in the service provider market.”
Whatever happens in the rest of the industry, the big three now control most of the world’s equipment sales and managed-service contracts, and will spend most of the market’s research and development dollars. Chaudhury says he expects the competition for managed networks and services contracts to heat up, especially in emerging markets.
“These contracts are very significant because they give vendors a certain amount of control over the networks,” he said. “This control helps them sell more equipment. There will be a lot more competition between Ericsson and Nokia Siemens.”
Nokia and Siemens stated in a press release that their infrastructure businesses currently generate a combined $20 billion in revenue per year.
The companies said they expect the venture to save about $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 entity.
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 and will oversee information technology and intellectual property rights. Nokia’s Mika Vehviläinen will serve as the joint venture’s chief operating officer, while Siemens’ Karl-Christoph Caselitz will be its chief market operations officer.
The joint venture is expected to begin operations by Jan. 1, 2007, and 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.
Analysts seemed to view the Nokia/Siemens transaction favorably, with Bear Stearns pointing out the combined company gives Nokia instant access to a wireline portfolio, while industry-wide, “This creates a stronger competitor in wireless, but removes an aggressive player in terms of pricing and helps the industry cope with overcapacity.”
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.”
Nokia is the world’s largest cell phone maker, but the company’s infrastructure business has long been a sore spot in the company’s overall financial position. Siemens used to sell mobile phones, but offloaded that business to Taiwanese manufacturer BenQ Corp.
The Nokia-Siemens deal adds to the growing list of consolidations within the crowded wireless infrastructure market. In April, Alcatel agreed to a $13.4 billion stock swap to acquire Lucent, and last October L.M. Ericsson spent $2 billion to buy Marconi Corp.’s broadband and telecom assets.
