With combined sales of 15.8bn euros ($19.9bn) in 2005, Nokia Siemens Networks becomes the number-three player in a market that will be led by the combination of Alcatel and Lucent ($21.6bn), followed by Ericsson ($20.4bn) inflated by its Marconi acquisition. It will be the second largest company, behind Ericsson, in wireless networks and third in fixed-line, behind Alcatel and Cisco Systems.
However, Munich, Germany-based Siemens is not putting its enterprise networking business, which had sales of 2.5bn euros ($3.2bn) last year, into the new company.
Instead, CEO Klaus Kleinfield said he is talking to a number of interested parties about forming a strong number two.
The Siemens/Nokia deal was hailed by Kleinfield as changing the face of the whole industry. But while executives vied with each other with superlatives to describe the new company, the fact is that Siemens has been looking for a partner for the loss-making operation for some time.
Espoo-based Nokia’s superior performance, meanwhile, is revealed by the fact that it will hold 50% of the joint venture, though only contributing just over 40% of revenue. The new company will be based in Helsinki, Finland and will be headed by Simon Beresford-Wylie, chief of Nokia’s network operations.
Estimated cost synergies of 1.5bn euros ($1.9bn) are expected annually by 2010 and a substantial amount will come in the first two years as 10% to 15% of the 60,000 workforce will be cut when up to 9,000 employees will lose their jobs when overlapping functions are cut and greater efficiencies sought in R&D.
Greater purchasing muscle is expected to drive down the acquisition cost of equipment by 4% to 5%, and the combined services operation will see its costs brought down by 2% to 3% though lower overheads.
A combination of 78% of revenue coming from wireless networks and 22% from fixed-line equipment is regarded as the perfect base for the new company to attack the convergence market, with all the ingredients for carriers wishing to offer quad play services.
This is the first major deal conducted by Nokia’s new CEO Olli-Pekka Kallasvuo. He said the communications industry is converging, and a strong and independent Nokia Siemens Networks would be ideally positioned to help customers lower costs and grow revenue while managing the challenges of converging technology.
For Kleinfeld, the deal represents another move to trim Siemens of struggling operations and follows the agreement to hand over its loss-making handset business to BenQ. There are no plans to float the new company and the precedent for the operation is the Fujitsu Siemens joint venture for IT hardware.
Both Nokia and Siemens expect the impact of the partnership to be accretive on their respective earnings per share, before restructuring charges, by the end of 2007. The deal is expected to close by January 1, 2007.
As for Siemens’ plans for the enterprise networking market, now is probably a good time to stitch together a company to take on Cisco there. Nortel Networks, which only plans to stay in markets where it has a 20% market share, would be a prime candidate for negotiations, particularly as it has data products, which Siemens doesn’t, though the companies’ voice portfolios would overlap.
Equally, 3Com, which only has its partnership with Huawei going for it, is rethinking its future and may also be willing to throw in its lot with a bigger entity. Since 3Com is a data-only player, there would be less overlap, though Siemens might be wary of 3Com’s absence from the enterprise business, which it exited in favor of a 100% SME strategy in 2000, killing its CoreBuilder enterprise switch portfolio. That created a lot of ill feeling in the enterprise space, however, making any serious attempt to return under its own brand difficult.
