Siemens and Nokia to merge network infrastructure divisions

Dan Bieler, Research Director, and Martin Garner, Director

On Monday 19 June 2006, Siemens and Nokia reported the merger of their respective network infrastructure divisions to form a 50/50 joint venture, i.e. no money is changing hands. The JV is registered in the Netherlands, headquartered in Finland with board control held by Nokia. Three of the future five divisions of the new company will be Munich based.

Simon Beresford-Wylie (currently EVP and GM of Networks at Nokia) will be CEO and Peter Schönhofer (member of the executive board of Siemens Austria) CFO. Nokia's CEO, Olli-Pekka Kallasvuo, will serve as chairman.

The entity is called Nokia Siemens Networks and had 2005 calendar year pro forma revenues of €15.8 billion (Nokia €6.6 billion and Siemens €9.2 billion). Wireless will account for about 78% of revenues (of which wireless services 22%) and wireline 22% (of which wireline services 6%).

Nokia and Siemens expect the deal to be EPS accretive by the end of 2007, excluding the restructuring charges of €1.5 billion and assuming deal closure by the end of 2006. After closing, the financial results of Nokia Siemens Networks will be consolidated by Nokia and accounted for at equity by Siemens (similar to Fujitsu-Siemens). Restructuring charges will be accounted for in the P&L of Nokia Siemens Networks.

The merger, following on the heels of the Lucent-Alcatel merger, creates one of the largest telecoms equipment companies. Nokia Siemens Networks is the second largest company in mobile infrastructure and services, third in fixed infrastructure and the third largest in the overall telecoms infrastructure market.

The company has an instant portfolio of fixed and mobile network products and professional services. The comprehensive portfolio comprises next-generation network-convergence products including IMS, 2G GSM/EDGE access, 3G WCDMA/HSDPA access, mobile core, fixed broadband, transport, IPTV, LTE, WiMAX and low-cost mobile voice products.

The companies estimate cost synergies of €1.5 billion annually by 2010. The key areas for synergies are the elimination of overlapping functions, consolidation and better utilisation of sales and marketing organisations, reduction of overhead costs, sourcing benefits, and greater efficiencies in R&D. Over the next four years, headcount reductions are thought to be in the range of 10-15% from the initial combined staff base of 60,000 (40,000 from Siemens and 11,000 of those in Germany).

The deal makes very good sense from Siemens' point of view. This is a credible step to address the challenges its struggling Com division is facing. By combining the "healthy" part of its Com division, i.e. the mobile and fixed network infrastructure activities, with Nokia's network activities, which had an EBIT margin of 13% in 2005, Siemens retains a key stake in a credible player in the equipment space. The JV allows Siemens to pursue the growth opportunities, especially in the core network area (wireless and fixed). Despite the JV, Siemens sees a possibility to continue its partnership with NEC.

For Siemens this deal shifts the attention now to its ailing Enterprise division and SBS. Although the Enterprise division remains 'unaffected' by the deal, it is clear that its poor performance will be effectively highlighted. We thus expect a similar deal or a complete sale for Enterprise in the medium term. The margin pressure on Siemens group should therefore ease noticeably going forward.

The merger also makes a lot of sense from Nokia's point of view because it brings scale, reach and a stronger reputation in fixed networks.

With this deal Nokia improves its presence in MEA, Eastern Europe, Latin America and parts of Asia Pacific - these are the markets that will account for the majority of the next 1-2 billion subscribers as the mobile market grows. In these areas prices need to be lower because disposable income is much lower than developed markets, so the greater scale of this venture is important.

Although Nokia has some presence in the fixed network, it is really known for the mobile side, so this move positions it firmly in both areas - crucial for the coming round of core network upgrades.

Any merger risks losing customers through overlaps and problems with customer relationship during the transition period. And we should be clear that this is a large and complex merger for the management team to take on. However, this JV strikes us as getting off to a good start, not least because of the asset mix, the limited customer overlap and the good atmosphere between senior management. No doubt, Nokia Siemens Networks will also add pressure to the Lucent-Alcatel merger.

Dan Bieler has ten years' experience in the telecoms market. He currently works as Research Director at Ovum, responsible for the German telecoms market.

Martin Garner is Director of Wireless Intelligence, the Ovum GSMA joint venture, responsible for bringing the service to market and commercialising it.