Nokia and Siemans

Talk is cheaper for merger partners

By Andrew Parker in London

Published: June 19 2006 19:27 | Last updated: June 19 2006 19:27

Nokia and Siemens hailed their planned joint venture as creating the world’s third-biggest supplier of network equipment to telecoms companies, while analysts predicted more consolidation.

The move follows the merger agreement in April between Alcatel, France’s telecoms equipment maker, and Lucent, its US counterpart, to create the world’s biggest network infrastructure supplier. Last October, Ericsson, Sweden’s telecoms equipment maker, bought most of Marconi of the UK.

“Consolidation is the name of the game, therefore we believe it is the right move for us,” said Klaus Kleinfeld, chief executive of Siemens.

The telecoms carriers that are the network equipment manufacturers’ most important customers have been leading the consolidation charge. In March, AT&T, the US telephone company, announced plans to create the world’s biggest telecoms group by buying BellSouth, its smaller rival.

Consolidation has raised the carriers’ purchasing power when buying network infrastructure. Some of the equipment manufacturers are responding through their own wave of consolidation to drive down prices through economies of scale.

Ian Watt, an analyst at Enders Analysis, an independent research firm, said: “The key point with equipment is there are huge economies of scale available, so there is a strong incentive to consolidate.”

Martin Garner, an analyst at Ovum, another independent research firm, said: “Nokia and Siemens are now up alongside Ericsson and Lucent and Alcatel in terms of scale, and should be able to compete at that level.”

Mr Kleinfeld identified three factors behind the consolidation sweeping the telecoms industry. First, the industry is undergoing radical change by embracing network technology based on the internet protocol.

Second, European and US telecoms companies are facing increasing competition from Asia. Third, many carriers are seeking to expand their capabilities so as to cater for all their customers’ needs: fixed-line and mobile phones, high-speed internet access, and, potentially, services such as television.

The joint venture between Nokia and Siemens would enable them to better cater for the carriers’ expanding needs. Nokia has principally focused on mobiles, while Siemens has offered more fixed-line equipment.

Mr Garner said smaller equipment manufacturers such as Huawei, Motorola, NEC and Nortel were likely to face pressure to explain their future strategies.

Companies identified as targets include Ciena, Juniper Networks and Tellabs. Mr Watt said: “Ultimately, we will see a handful of very large equipment vendors . . . and a plethora of smaller players who are more nimble and innovative.”

While Nokia and Siemens may reap huge economies of scale through their joint venture, some analysts said their collaboration could prove challenging.

Per Lindberg, analyst at Dresdner Kleinwort Wasserstein, the investment bank, said it would take at least two years for Nokia and Siemens to integrate their products, “at a time of critical tender activity” because Brazil, China, India and Russia were releasing spectrum for 3G mobiles.

Copyright The Financial Times Limited 2006