Nokia Siemens JV in Jeopardy

A corruption scandal that includes charges of money-laundering via Greece and Lichtenstein has thrown a spanner into the works of the merger that would create the world's second-largest vendor of wireless infrastructure.

In a terse, 219-word statement, Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE), whose combined networks divisions were forecast to generate $23.15 billion in revenue in 2007, said they would delay the launch of the joint venture until the first quarter of 2007 rather than starting with the new year. (See Nokia, Siemens Create Networks Giant.)

"In light of the current investigations of Siemens, the scope of which includes the carrier-related business to be transferred to the new company, Nokia and Siemens intend to adjust their agreements in order to have Siemens conduct an appropriate compliance review prior to closing of the transaction," the two companies said.

The statement also said the merger "will be subject to an agreement between Nokia and Siemens on the results and consequences of a Siemens compliance review."

The announcement followed a meeting of the Siemens supervisory board on Monday to discuss the affair, which has already resulted in the arrest of a former top manager of the company's telecoms equipment division. German newspaper Frankfurter Allgemeine Sonntagszeitung ran a story over the weekend quoting an anonymous Siemens manager, who said the company fears that Nokia might pull out of the joint venture entirely depending on how far the scandal reaches.

Authorities have raided Siemens offices including that of CEO Klaus Kleinfeld, charging that the company has engaged in kick-backs and bribes for European network contracts, and has funneled money through private accounts in Switzerland, Greece, and Lichtenstein.

The market uncertainty surrounding the now wobbly JV will the hurt the combined companies even more than the direct financial losses from delaying for a few months, says Carmi Levy, senior research analyst at Info-Tech Research Group.

"On the surface, it delays the start of a combined revenue stream and the realization of the projected economies of scale that justified the deal in the first place," Levy comments in an email. "More deeply, it puts potential clients on hold as they wait for the Siemens investigation to play out."

"This is a timetable change only," asserts Nokia spokeswoman Laurie Armstrong. "The intent to form Nokia Siemens Networks and the business logic of the transaction remains unchanged and we will continue the integration process as planned."

That, however, could change. Asked if the growing scandal is enough to scuttle the merger, Gartner Inc. research vice president Phillip Redman replied, "Absolutely" in an email.

"This is enough for Nokia to walk away now without penalty, especially if financials are at stake and misstated," Redman adds. "This could take a long time to sort out and Nokia may not have the patience."

Abandoning the combination now would leave a gaping hole in the strategies of both Nokia, the world's No. 1 maker of cell phones, and Siemens, whose stock has shot up nearly 20 percent since the deal was announced in June. An October report from Unstrung Insider, titled "Vendor M&A Frenzy: What Happens Next," noted that major deals including most of the largest wireless infrastructure providers have created a "de facto oligarchy" of suppliers that will account for more than 80 percent of worldwide cellular infrastructure revenues in coming years.

"Size directly influences a vendor's ability to invest in R&D, optimize the supply chain and manufacturing, provide financing, achieve geographic diversity, and, ultimately, make a profit," wrote analyst Gabriel Brown, the author of the report.

The worldwide wireless infrastructure market is expected to hit $56 billion in 2006. Ericsson AB (Nasdaq: ERIC), the world's No. 1 vendor, controls around 26 percent of that. The combined Nokia Siemens Networks would have about 20 percent, according to analysts' estimates.

— Richard Martin, Senior Editor, Unstrung