Big Wireless-Gear Deal May Loom
Motorola, Nortel in Talks
To Merge Units, Technology
In Sector That Has Faltered
By SARA SILVER and MATTHEW KARNITSCHNIG
February 11, 2008; Page A3
Motorola Inc. and Nortel Networks Corp. are in talks to combine their wireless-infrastructure units in a joint venture, said people familiar with the situation, the latest response to slowing growth in the telecom-equipment industry.
The talks, which are separate from efforts also under way at Motorola to possibly shed its handset division, show the steps Motorola's new chief executive, Greg Brown, is contemplating to restructure the telecom giant.
If consummated, the talks will create a joint venture that likely will have sales of about $10 billion, combining businesses that make network equipment for wireless phone carriers. It is an area of the industry that has suffered in recent years as wireless carriers in the U.S. and overseas consolidate, giving them greater bargaining leverage over equipment makers.
The industry responded with a wave of deal making in the past couple of years, leaving the field dominated by a few large equipment makers including Telefon AB L.M. Ericsson, Alcatel-Lucent, and Nokia-Siemens Networks, a venture of Nokia Corp. and Siemens AG.
But pressures have increased as carriers in the U.S. and Europe slow their spending on network equipment while they wait for the next generation of technology that can handle the high-speed data necessary for richer Internet and video features on cellphones. At the same time, new entrants from China are putting downward pressure on prices.
In a sign of how equipment makers are suffering, Alcatel-Lucent on Friday reported a $3.7 billion loss after taking a big charge to write off the value of one of the main businesses acquired in the 2006 Lucent merger.
Creating a joint venture between Motorola and Nortel would allow the businesses to cut costs in sales and marketing and eventually research and development, while giving them scale to compete for network upgrade contracts. But the group faces an uphill battle against its much larger competitors.
The joint-venture talks have been under way for nearly a month and are heating up, the people said. The scenario under discussion now is a venture majority owned by Nortel, with Motorola owning a minority stake. The companies had considered taking 40% each of the venture, with the other 20% to be held by a financial investor. But that idea was discarded after they had trouble finding a source of private equity.
Both Motorola and Nortel are grappling with wide-ranging challenges across their businesses. Mr. Brown has been trying to fix the company's handset division, which accounts for about half of Motorola's $36 billion in annual sales and is rapidly losing market share. He faces a proxy campaign by activist shareholder Carl Icahn, who wants Motorola to break itself up and who recently nominated candidates for election to the company's board at the annual meeting this spring.
Motorola doesn't break out financial results from the network-equipment business. The business is part of Motorola's Home and Networks Mobility division, and industry observers estimate it accounts for a little more than half the division's $10 billion in annual sales. Analysts have long urged Motorola to sell the business. While the unit's sales have stagnated, executives say it is profitable.
If Motorola completes a deal with Nortel and divests itself of its handset business, it would be a much smaller company. Its main businesses would be making two-way radio equipment for emergency workers, hand-held devices for workers on the road and equipment for the cable industry, including set-top boxes.
Toronto-based Nortel struggled to overcome the effects of a 2004 accounting scandal that led to the firing of its CEO, other top executives and board members. In late 2005 it named as its new CEO Mike Zafirovski, who had been the No. 2 executive at Motorola. He joined the same month that Ericsson announced it would buy part of Marconi Corp.'s telecom network business, setting off the wave of consolidation in the industry.
Mr. Zafirovski has laid off thousands of workers, sold and shuttered unprofitable businesses, and smoothed operations to cut costs. But mergers among phone companies have given carriers more negotiating power. In recent years, Nortel has walked away from deals that would erode its profit margins. It made a big push to supply equipment to businesses, where it faces off against networking giant Cisco Inc.
Nortel's wireless business to be included in the joint venture represented about one-third of Nortel's $7.75 billion sales in the first nine months of 2007.
The proposed venture would combine each company's versions of the GSM network technology used in much of the rest of the world with the CDMA technology popular in the U.S. and Korea. The venture would also include Motorola iDEN networks, which provide the push-to-talk technology used by the troubled Sprint Nextel Corp., which has been losing subscribers as it seeks to transfer them to its CDMA networks.
Both Motorola and Nortel's wireless businesses have invested heavily in a broadband technology called WiMax, whose future is unclear at its largest customer, Sprint Nextel. Other major U.S. carriers are pursuing an alternative broadband technology, which Nortel also makes.
Write to Sara Silver at sara.silver@wsj.com and Matthew Karnitschnig at matthew.karnitschnig@wsj.com |
