In the latest bout of consolidation in the telecoms equipment sector, Nokia has agreed to merge its networks business with Siemens' less profitable business. It creates the world's third-largest telecoms equipment company with combined 2005 revenue of $20bn (£11bn).
Between 6,000 and 9,000 jobs will be axed as a result of the merger. Nokia will take the helm and seek to address the problems Siemens has struggled to address in its telecoms equipment division for the past six years.
The joint venture, named Nokia Siemens Networks, will be equally owned by the two parent companies but will be based in Helsinki and headed by Simon Beresford-Wylie, the Australian Nokia executive in charge of its networks division.
The merger provides both companies with scale in a market dogged by severe price competition. Chinese competitors such as Huawei have undercut traditional players on price and taken significant market share from established rivals. Last year, the British telecoms equipment company Marconi was sold to Ericsson for £1.2bn after it lost out to Huawei in the massive upgrade of BT's UK network. This year, France's Alcatel agreed to merge with US equipment maker Lucent to build scale.
The two companies aim to save €1.5bn (£1bn) a year by 2010 by merging. Richard Windsor, at Nomura Securities, said with a combined workforce of 60,000, the planned job cuts "do not go far enough" and that cutting 20,000 jobs would be required to bring the business in line with the rest of the industry.
From an operational standpoint, the rationale for the merger is to take advantage of the increasing convergence of fixed and mobile telecom services. That strengthens its hand against the industry heavyweights Cisco and Ericsson and should improve its profitability. Excluding restructuring charges, both companies expect the merger to boost 2007 earnings.
Nokia's leadership position in the joint venture creates risk as it has no fixed-line business, but Mr Windsor noted that Nokia's management had sensibly given itself plenty of time to turn around the business.Reuse content