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Nokia, Siemens agree to tie-up

Monday, June 19

HELSINKI/FRANKFURT (Reuters) – Nokia and Siemens have agreed to combine
the bulk of their telecom networks businesses to create one of the biggest players
in the industry, sending shares in both firms higher.

Analysts put a value of 20-25 billion euros ($25.2-$31.5billion) on the new business,
whose Finnish and German parents will exchange no money to do the deal.
Around one in five mobile phone calls is already made via a Siemens or Nokia network.

The units in the 50-50 venture, “Nokia Siemens Networks,” had sales of 15.8 billion
euros last year, which would make it the second-biggest mobile equipment player
and third in fixed infrastructure, the companies said on Monday.

Shares in industrial conglomerate Siemens were up 7.1 percent at 67.25 euros
by 1451 GMT on relief it had found a solution for an operation that has long been
a burden.

Nokia gained 2.9 percent to 16.11 euros as it achieves critical mass for its networks
business. That unit has suffered from fierce price competition, including from new Asia
rivals, in the fight for orders from the big telecoms operators in a consolidating industry.

“I think in the longer term it’s good. For Nokia, it’s size, and size matters when you’re
talking about the networks services business,” said Hannu Rauhala, a analyst
at Optsock in Helsinki.

He said the deal, which brings Nokia Siemens Networks within reach of giant
Ericssion, would allow the companies to grow more quickly in a low-growth market.

“Siemens has a very good position in fixed-line networks, and it offers very good
possibilities when you are talking about convergence,” he said.


***Number four ranking***

In the overall telecoms infrastructure market, the joint venture will rank behind industry
leader Cisco Systems Inc., the merged Alcatel-Lucent and Sweden-based Ericsson
by total sales.

The combination of Nokia’s networks unit and the Siemens carrier business in fixed
and mobile networks will offer some savings, and up to 9,000 jobs are due to be cut.

It will also help the companies get ahead in converged systems, the technology that
allows fixed-line and mobile operations over the internet.

“The boundaries are blurring,” said Nokia’s Simon Beresford—Wylie, who will be chief
executive of the venture.

Siemens has been searching for years for a solution for its telecoms equipment unit,
Com, after offloading its loss-making mobile phones division to Taiwan’s BenQ
last year.

The German company, whose cornerstone was laid when founder Werner von
Siemens invented the pointer telegraph more than 150 years ago, has moved away
from its roots as telecoms markets have grown more cut-throat in recent years.

Siemens’ works council and the IG Metall trade union issued a statement criticizing
management, saying they were putting the short-term interests of investors first,
instead of working harder to turn the telecoms business around.

They demanded job and workplace guarantees for the affected staff and said
agreements about working conditions currently in force should be taken over
by the joint venture.

The Siemens Com unit made an operating profit of 454 million euros last fiscal year,
or 3.5 percent of its sales of 13.1 billion euros. But Siemens will keep its Enterprise
business, which tailor-makes telecoms systems for firms, for now, though it its
actively pursuing a divestment.

Nokia’s networks division has an operating margin of 13 percent last year and the joint
venture will target a margin in “double digits” already in the first year.

***Profit boost***

Nokia and Siemens said they both expect to boost their earnings per share by the end
of 2007 on a pro-forma basis before restructuring charges, which Beresford-Wylie
said would total about 1.5 billion euros. But the parent firms decided the venture
would not pay them dividends for the first two years.

The companies expect cost synergies of 1.5 billion euros annually by 2010 and said
they would cut 10 to 15 percent of the new business’s combined workforce of 60,000
over four years.

“I like the idea (of the tie-up) but I think it’s risky,” said Nomura analyst
Richard Windsor.

“On the wireless side Nokia is sub-scale and putting them together will help.
But in wireline Nokia has no business whatsoever and it’s now being tasked with
turning around a business that Siemens failed to do over the last six years.”

The deal will face review by competition and antitrust officials in Europe and
the United States because of its size and the amount of business the parents do
in those markets. But analysts and the companies said they did not expect
any major difficulties with regulators.

Nokia executives has emphasized in recent months they are open to acquisitions
as well as joint venture to boost the company’s position in various markets, and
in February it agreed to set up a handset venture with Sanyo Electric Co. of Japan.

But Nokia has shied away from major takeover despite hefty cash reserves, totaling 9
billion euros at the end of March.

Nokia Siemens Networks will have its headquarters in Finland, the base of Beresford
-Wylie, who currently heads Nokia’s networks division. It will also have a regional
headquarters in Munich, the home city of Siemens.