Nokia, Siemens Create Networks Giant

Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE) are combining their carrier infrastructure businesses to create a 50/50 joint venture called Nokia Siemens Networks.

The new company, comprising Nokia's Networks Business Group and the carrier-related operations of Siemens Communications Group , has annual revenues of €15.8 billion (US$19.9 billion), based on calendar 2005 sales. Nokia recorded revenues of €6.6 billion ($8.3 billion) and an operating profit of €855 million ($1.1 billion) from its networks group in 2005, leaving €9.2 billion ($11.6 billion) coming from the Siemens Communications Group.

The joint venture does not include Nokia's market-leading mobile handset business or the Siemens Communications' enterprise infrastructure operations.

The two companies expect Nokia Siemens Networks to achieve annual cost savings of €1.5 billion ($1.9 billion) by 2010. These savings will come largely from headcount reductions. Restructuring charges will also total €1.5 billion, of which 75 percent will be recorded in the first two years of operation. All restructuring charges will be borne by the joint venture.

Nokia Siemens Networks will have about 60,000 staff at its inception, but will then lose between 6,000 and 9,000 staff over the next four years. Nokia's networks group had 18,332 staff at the end of 2005, but is contributing about 20,000 staff to the new venture, while Siemens accounts for the other 40,000.

Simon Beresford-Wylie, currently head of Nokia's networks unit, will be the new company's CEO, while Siemens AG Austria executive board member Peter Schönhofer will be CFO. Nokia's CEO, Olli-Pekka Kallasvuo, will be the joint venture's chairman. The new company is expected to be formed by the end of 2006. Its operational headquarters will be in Helsinki, while Munich will house a "strong regional headquarters," where three of the new company's five divisions will be based.

The news sent Nokia's share price up €0.46, nearly 3 percent, to €16.11 on the Helsinki stock exchange this morning, while Siemens AG saw its stock leap €5.10, more than 8 percent, to €67.91 on the Frankfurt exchange.

News of the joint venture comes less than three months after Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) announced their merger. (See Alcatel, Lucent Seal Deal.)

It also ends months of speculation about the future of Siemens Communications. Light Reading first reported that Nokia and Siemens were engaged in talks in March. (See Sources: Lucent, Nokia in Play for Siemens and Siemens Comm Has M&A Callers.)

Since then, Siemens has named a new president for the Communications Group and cut more jobs as it looked for a partner. (See Siemens Shuffles Top Deck and Siemens Cuts Another 1,000 Jobs.)

"This joint venture is an important step to strengthen our position in the market," stated Siemens AG's CEO Klaus Kleinfeld in a prepared statement. "This combination creates a leading industry player with immediate strength, excellent potential for growth and well-positioned to improve future profitability."

Nokia's CEO Kallasvuo commented: "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."

Patrick Donegan, senior analyst for wireless at Heavy Reading reckons this is "a relatively conservative move, although culturally the fit will probably be better than some of the other merger and acquisition options.”

But he notes that this combination lacks the strong transatlantic presence of a combined Alcatel/Lucent. "The new company’s biggest challenge will be in North America, where it currently has some presence in wireline via Siemens, but no presence whatsoever in 3G mobile networks.” Siemens had been named as a supplier of 3G equipment to Cingular Wireless , but lost the contract early this year.

The two companies say Nokia Siemens Networks will be the world's third largest telecom infrastructure company, behind a combined Alcatel/Lucent and Ericsson AB (Nasdaq: ERIC).

And based on current market data, they claim it will be the number two vendor in mobile infrastructure, hold the same position in services, and be the number three in fixed line infrastructure. The systems portfolio covers all the major sectors and buzzwords, including IMS, 3G, IPTV, broadband access, fixed/mobile convergence, and WiMax.

Once formed, the new company's financial results will be consolidated by Nokia, and be accounted for "at equity" by Siemens AG. Both parent companies expect the joint venture to be earnings accretive by the end of 2007 as long as the deal is closed before the end of calendar 2006.

Today's news will turn the spotlight back on Nortel Networks Ltd. , which is looking to play a part in the industry consolidation. Many industry executives and analysts had regarded Nortel as a sensible partner for Siemens Communications. (See Nortel CEO: We're Ready to Deal.)

— Ray Le Maistre, International News Editor, Light Reading