The Press on Nokia Siemens Networks JV
>> [Nokia-Siemens] Telecom Giants in Europe Plan $30 Billion Deal
Andrew Ross Sorkin
The New York Times
June 19, 2006
nytimes.com
Nokia of Finland and Siemens of Germany are expected to announce today that they will merge their telecommunication network equipment businesses in a deal valued at more than $30 billion, people involved in the transaction said last night.
The merger is likely to set off a new global wave of consolidation and a round of price wars as the telecommunication industry continues to remake itself after last decade's boom-and-bust cycle.
The cross-border deal, which was approved by the boards of both companies, would create the world's third-largest network equipment concern behind Ericsson and a combined Lucent and Alcatel, which announced plans to merge three months ago. The transaction is also likely to put considerable pressure on Motorola, which will fall to the No. 4 position among network equipment makers in the world, just as its business is turning around as a result of its hot-selling Razr cellphones.
The network equipment industry makes the fiber optic cables, routers and wireless beacons that act as the backbone of the communications world for telecommunications carriers like Cingular and Verizon. While Nokia's cellphone business will remain largely unaffected as a result of the deal, it could use the combination to provide network equipment to carriers that includes advanced features for its phones.
Motorola has been able to couple its network equipment for Nextel, which is now part of Sprint, with technology for its walkie-talkie handsets with much success.
The combination of Nokia and Siemens is being driven, in part, by the fact that so many of the world's biggest carriers — the clients of the equipment makers — are merging themselves, as AT&T's has by acquiring BellSouth and Sprint has in a deal with Nextel. The deal is also being spurred by growing competition from emerging rivals in Asia, which are increasingly finding ways to deploy new technologies while lowering costs.
The deal involves creating a new company into which both Nokia and Siemens will merge their network equipment businesses, people involved in the transaction said. It is being structured somewhat like a joint venture because both companies will own the business, they said.
Analysts have been predicting mergers between the largest telecommunications equipment makers in the five years since the Internet bubble collapsed. As wireless and conventional phone companies merged and the binge in spending on state-of-the-art fiber optic networks subsided, carriers slashed their budgets for new equipment.
At the same time, new low-cost competitors entered the market, particularly from Asia. Huawei, based in China, for instance, has been able to win contracts in Asia in places where Lucent and others had previously been successful.
Siemens was particularly vulnerable. The company sold its cellphone handset division to BenQ, of Taiwan, last summer. BenQ still uses the Siemens brand name and Siemens factories in Germany, but the Taiwanese company ultimately hopes to build a brand of its own.
With its retail presence diminished and prices for network equipment falling, Siemens was long thought by industry analysts to be considering ways to cushion itself in an increasingly volatile market. The company sells equipment to wireless carriers like Cingular in the United States.
Siemens is also likely to face increased pressure when Alcatel and Lucent complete their merger because Alcatel provides G.S.M. wireless technology and Lucent is a leader in the rival C.D.M.A. technology. With Siemens joining forces with Nokia, the combined company will have more money to develop products and additional customers.
At the same time, Nokia has been looking to strengthen its network business to compete better with Motorola, analysts said.
Both companies are also likely to compete for contracts in developing countries in Asia, Africa and Latin America, where wireless networks are still being expanded.
A deal between Nokia and Siemens leaves open the question of what will happen to Nortel, the Canadian network equipment maker. The company has weathered several years of accounting troubles and its stock has been pummeled during that time. Nortel is one of the largest companies on the Toronto Stock Exchange and Canadian officials might be reluctant to see it fall into foreign hands.
Nokia and Siemens expect their combination will create about $1.5 billion in annual savings by cutting back office costs and creating other efficiencies, the people involved in the transaction said. Both companies decided to structure the deal so that they would continue to retain stakes in the combined business, so they could gain if the value of the entity rises because of the enormous expected savings, these people said. The structure of the deal is somewhat surprising because Siemens was expected to sell or spin off its network equipment business. <<
>> Siemens' Deal Seen Positioning Nokia For Future
Magnus Hansson
Dow Jones Newswires (MarketWatch)
Stockholm
June 19, 2006
tinyurl.com
Nokia Corp.'s (NOK) move Monday to merge its network equipment arm with Siemens AG's (SI) infrastructure unit will improve the Finnish company's prospects in the growing market for converged fixed and mobile telecoms networks, said analysts.
Nokia and Siemens said Monday they have agreed to combine the units to create Nokia Siemens Networks, to be based in Finland.
The business would be the third-largest player in the telecoms infrastructure market after the recently-unveiled merger of France's Alcatel SA (ALA) with U.S. based Lucent Technologies Inc (LU) and Sweden's Telefon AB LM Ericsson (ERICY), which recently acquired most of U.K. based Marconi's assets.
"The deal gives Nokia Networks scale and also positions it for convergence of fixed and mobile networks," said Damien Chew, an analyst at ING in London. Chew has a hold rating on Nokia.
At 1110 GMT shares in Nokia were up EUR0.69, or 4.5%, at EUR16.34. Siemens jumped EUR5.51, or 8.8%, to EUR68.32.
The deal gives Nokia greater exposure to fixed line infrastructure and it will give cost-cutting opportunities as overlapping functions are eliminated.
The global telecoms equipment market is expected to be worth around $106 billion in 2006 with almost 60% coming from wireless and just over 40% from fixed-line equipment, according to a recent review by UBS.
Large parts of fixed-line and mobile networks are expected to eventually merge into one common network based on Internet Protocol, or IP, requiring equipment suppliers to have products from both segments.
By 2010, the companies expect to have saved EUR1.5 billion in savings, most of it coming in the first two years, they said.
The new company expects to cut up to 9,000 of its 60,000 staff. But with Nokia taking control of the company and headquarters going to Finland, most cuts are expected in Germany, analysts said.
Nokia is the world's largest mobile phone maker and the third-largest supplier of wireless networks behind Ericsson and Siemens, but lacks a significant presence in the fixed-line market.
According to estimates by Credit Suisse, Nokia and Siemens would jointly have a market share just above 21% in the wireless infrastructure market, behind Ericsson's 26%.
"Consolidation in the telecom equipment sector is good for everyone in the long run and for competitors to the merger candidates also in the short run," said Anders Berg, an analyst at Evli Bank in Stockholm. Berg says a market dominated by fewer and larger players will ease price pressures and improve profitability.
The Nokia-Siemens deal does carry risks. As overlapping products are eliminated, the company will have to handle its customer relations carefully, analysts said.
Hutchison Whampoa Ltd (0013.HK), for example, which operates the 3 network in the U.K., is supplied by both companies.
"It's extremely complex to merge two infrastructure units and we're skeptical because of this," said Greger Johansson, an analyst at Redeye in Stockholm.
Nokia had to date steered clear of mergers and acquisitions activity but management has lately mentioned the possibility of deals to fortify its position in an increasingly complex market. <<
>> Nokia Siemens Networks JV Will Help Both Cos Fend Off Global Competitors
Alfred Kueppers
AFX News Limited
Frankfurt
06.19.2006
tinyurl.com
The merger of Siemens AG and Nokia Corp's networks operations, which ratchets the ongoing consolidation process within the sector up another notch, will help both companies fend off intense price competition from the recently merged Alcatel SA/Lucent and several North American and Asian players, analysts said.
Creating the joint venture also allows Siemens chief executive Klaus Kleinfeld to unload an underperforming unit that had little chance of achieving an internal company target of an 8 pct operating profit margin by April of next year.
For its part, Nokia will need to apply the lessons from its own highly profitable business to Siemens operations in order for the merger to succeed, analysts said.
'It at first glance looks like a highly value-enhancing move because Siemens merges its unprofitable activities (estimated 1 pct EBT margin on about 10 bln eur revenues) with Nokia's very profitable activities (10-15 pct EBIT margin),' Kepler analysts wrote in a note to clients.
Though referred to as a 50:50 joint venture, Nokia will appoint one of its own vice presidents, Simon Beresford-Wylie, as chief executive officer, and consolidate the results in its quarterly statements. Siemens will record the joint venture at equity.
With annual sales of 15.8 bln eur, Nokia Siemens Networks will be the third largest player in the sector overall, trailing Alcatel/Lucent and Ericsson/Marconi, which announced their mergers in 2006 and 2005, respectively.
The joint venture is expected to generate cost savings of 1.5 bln eur annually by 2010, including staff reductions of 10-15 pct from the current combined workforce total of 60,000.
The deal is expected to close on Jan 1.
Siemens said it will face restructuring costs of 1.5 bln eur by 2010 as a result of the merger.
Siemens will contribute businesses with 9.2 bln eur in revenue to the new company, while Nokia will add operations with 6.6 bln eur in annual sales.
After the other recent major mergers in the industry, analysts said it was a move whose time had come, particularly given aggressive pricing by China's Huawei Technologies Co.
'Following the merger of Alcatel and Lucent, Nokia Networks was the third largest mobile network maker as measured by 2005 figures,' analysts at Helsinki-based FIM Securities said.
'The market leader, Ericsson, strengthened also its fixed-mobile synergies by acquiring Marconi. Also the entry into the mobile network market by Huawei and ZTE, which they have speeded by offering 30 pct lower prices than Western manufacturers, has created merger pressures.'
Beresford-Wylie faces a range of challenges in integrating the two businesses, the largest of which will be increasing the efficiency of Siemens's networks operations.
'We anticipate a complicated and tedious merger process (cf. Alcatel-Lucent) resulting in loss of revenues (platform transition, customer overlap, merger uncertainties) and delayed streamlining benefits (protracted union talks etc),' DresdnerKleinwortWasserstein analysts wrote.
'As such we believe this move raises the risk exposure of the Nokia Group, which, as chosen consolidator of the JV, looks poised to face material margin compression and profit growth moderation.'
However, they noted that the merger also holds considerable advantages for Nokia because it will allow the Finnish company to offer 'convergence' communications products including broadband access and transmission products.
The joint venture's major rivals are expected to benefit in the short term from strains created by the integration process, analysts said.
'I think it is positive that industry consolidation is continuing,' Jan Dworsky at Handelsbanken said.
'There will be a period when Siemens and Nokia will have to deal with integrational issues, which could mean they will be less aggressive in the marketplace. So in the short term it is positive news (for Ericsson).'
In the long term, they said the industry will benefit from more stable pricing.
'Industry consolidation is good for industry margins, so this is good news. As the industry consolidates, the cost base falls, which boosts profits, with the fight for market share also subsiding,' a London-based analyst said. <<
>> Nokia-Siemens J/V to Hold Off Dividends for 2 Years
Reuters, Helsinki
June 19, 2006
tinyurl.com
A new telecoms infrastructure joint venture between Nokia and Siemens AG will not pay a dividend to the parent companies for the first two years of operation, Nokia's chief financial officer said on Monday.
"We agreed at this point we would have a two-year holiday on dividends back to the parents and then we would step it up to 25-50 percent going forward from there," CFO Rick Simonson told an analysts' conference.
"And of course we on the board will review that as we go forward and any ... excess cash that's on that balance sheet you can be sure will come back to the parents." <<
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