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Nokia, Siemens merge telecom activities in bid to close gap on Ericsson

FRANKFURT - Siemens and Nokia said Monday they would merge their telecom equipment and network activities to create the sectors’ third-biggest company and close the gap on market leader Ericsson.

The tie-up between the Finnish and German giants follows hot on the heels of the recent merger between Alcatel and Lucent, marking a further step in the consolidation of the highly fragmented telecom equipment industry in a move that analysts said could spark other deals.

Nokia and Siemens announced in a joint statement they would set up a 50-50 joint venture, to be called Nokia Siemens Networks, which would combine Nokia’s networks business division and Siemens’ carrier-related operations for fixed and mobile networks.

Siemens’ enterprise networks business -- which handles telephone systems for offices and companies -- was not included in the deal, but would be spun off into a separate legal entity in preparation for a separate partnership deal elsewhere.

The deal with Nokia was expected to close before January 1, 2007, pending the necessary regulatory approvals.

Nokia and Siemens estimated it could begin to have a positive effect on earnings per share by the end of next year.

Nokia Siemens Networks would have annual sales of close to 16 billion euros (20 billion dollars) and a workforce of 60,000, making it number three in the sector behind Ericsson and Alcatel/Lucent.

It would be headed by Simon Beresford-Wylie, currently head of Nokia Networks, and have its operational headquarters in Helsinki. But three out of the group’s future five divisions would be based in Munich.

The tie-up of the two businesses would lead to annual cost-cutting of 1.5 billion euros by 2019, primarily via the elimination of overlapping functions, better utilisation of sales and marketing organisations, reduction of overhead costs, improved sourcing and more efficient research and development, Nokia and Siemens said.

The integration of the two businesses would also lead to job cuts, with 10-15 percent of the combined 60,000-strong workforce -- or 9,000 jobs in all -- to be axed over the next four years.

Siemens calculated that it faced restructuring costs of 1.5 billion euros by 2010 as a result of the merger.

“We believe the partnership with Siemens is the most effective way to build the scale and broad product portfolio necessary to compete globally,” said Nokia chief executive Olli-Pekka Kallasvuo.

“The communications industry is converging, and a strong and independent Nokia Siemens Networks will be ideally positioned to help customers lower costs and increase revenue while managing the challenges of converging technology,” he said.

Siemens CEO Klaus Kleinfeld said: “This joint venture is an important step to strengthen our position in the market sustainably. This combination creates a leading industry player.”

Siemens has long been looking for a partner for its troubled telecom divison, known as Com, after already selling its mobile handset operations to Taiwan consumer electronics group BenQ last year.

The business is Siemens’ largest division with annual sales of 13 billion euros. But it made a profit of just 27 million euros in the second quarter, equivalent to a return of sales of just 0.8 percent.

The latest announcement “is positive for Siemens given the problems they have had in restructuring their networks business and it gets them out of the telecom market after selling the handsets business to BenQ,” said one stock market trader.

“It shows Siemens as a management team is capable of real restructuring and asset rationalization,” he said.

Merck Finck analyst Theo Kitz agreed.

“It’s very positive for Siemens,” he said.

Investors appeared to think so, too, with Siemens shares soaring 5.44 euros or 8.66 percent to 68.25 euros in midday trade on the Frankfurt stock exchange.

BNP Paribas upgraded its recommendation on Siemens shares to ”outperform” from “neutral” in the wake of the deal.

In Helsinki, Nokia shares were showing a gain of 4.35 percent at 16.33 euros.

“The is good news for everybody, although Siemens got the better end of deal since they got rid of a business that was losing money and acquired 50 percent of a business that is making money,” one London-based analyst said.