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Nokia, Siemens Point the Way

As the two European giants join forces to compete globally, telecom’s long-awaited wave of consolidation has likely begun

By pooling their resources in the highly competitive telecom equipment business, Nokia Corp. and Siemens AG stand a better chance of competing for huge contracts that will soon come up for bid in critical growth markets such as China and India.

Nokia (NOK ), the Finnish telecom equipment giant, and Germany’s Siemens (SI) said on June 19 they will combine their network equipment businesses in a 50-50 joint venture valued at $31.6 billion. The deal is clearly aimed at cutting costs to make the companies more effective in the global market. The companies say they expect to be able to cut annual costs by more than $1.5 billion because 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 and create value for shareholders,” Nokia CEO Olli-Pekka Kallasvuo said (see BusinessWeek.com, 6/19/06, “Nokia, Siemens Plan to Join and Conquer”). He will serve as chairman of the joint venture, which will be called Nokia Siemens Networks.

The biggest battles in the global communications equipment market will occur in Asia, particularly in China and India. Over the next three years, China is expected to put up for bid contracts for third-generation wireless networks worth $10 billion to $12 billion, according to analyst Susan Kalla of Caris & Co. “The Siemens-Nokia deal is a cost-cutting exercise aimed at getting business in China by pooling resources and cutting overlap so the companies can sell their products at lower prices than they could have on their own,” Kalla said. She downgraded Nokia to “above average” from “buy,” reflecting concerns that the joint venture will face risks in the global market.

The China contracts are the biggest contracts up for grabs. Other big opportunities in the global market include India, where deals worth at least $5 billion are expected to be signed during the next few years.

BusinessWeek JUNE 20, 2006
Technology
By Steve Rosenbush