In my earlier article, I have mentioned the main contrast between merger and acquisition.

Merger encompassed a combination of two friendly and almost equaled size entities. It is the willingness of the parties concerned to merge unlike a hostile takeover or acquisition.

In a merger, the parties concerned normally form a new joint venture entity with the parties having equal shareholding in same.

Recently, in June 06, there was the announcement of the MERGER between two giant telecom vendors Nokia and Siemens. The proposed deal shows an exemplary example of a merger for a win-win scenario where perceived benefits/synergies might arise from this proposed deal.

So, let’s look at a little of the following background,proposed set up/shareholding, key potential costs and rationale & perceived benefits/synergies:

• both are from Europe - one Finnish and the other, German; (as both are from Europe, there is lesser possibility of any cultural barriers );
• they are big communications giants and both share the intention to join together their respective network/communications equipment and service provider businesses to create the sectors’ third-biggest company and close the gap on market leader Ericsson;
• this proposed follows hot on the heels of the recent merger between Alcatel and Lucent, marking a further step in the consolidation of the highly fragmented telecoms equipment industry;
• a new 50-5- joint venture company will be formed;
• this new company will instantly become the third largest communications equipment provider in the world with annual revenues of over 15 billion Euros or more than US $30 billion;

Proposed Set Up of the new entity in relation to shareholding, person at helms, pro-forma financials:

• The new entity is 50-50 joint venture, called Nokia Siemens Networks and will encompass both fixed-line and mobile networking products as well as managed services offered to carriers;
• 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;
• Nokia Networks have its operational headquarters in Helsinki. But three out of the group’s future five divisions would be based in Munich;
• Nokia still has an enterprise business unit, and Siemens is keeping its own business unit that sells PBXs and networking equipment; and Nokia and Siemens will remain separate companies with distinct enterprise offers and channels for other divisions.

• At the helm of the new venture as CEO is Simon Beresford-Wylie, currently executive vice president and general manager of networks at Nokia, with Siemens board member Peter Schönhuber appointed chief financial officer; Nokia CEO Olli-Pekka Kallasvuoa will take up the role of chairman, while the Finnish company’s current general manager of networks;
• Pending regulatory approval—the pro forma financial statement of the new entity is estimated to show annual revenues of €15.8 billion ($19.8 billion) and should rank among the top three communications equipment providers;
• The companies said the new joint venture will be immediately profitable. Approximately 78 percent of its revenue will come from wireless products, with the remainder coming from the fixed-line business.

Potential Costs Involved:

• Nokia and Siemens aim to save cash through the marriage, predicting cost reductions of €1.5bn per year by 2010.

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

Rationales & Perceived Benefits/Synergies:

• The union is aimed at making both companies bigger players in the fixed-mobile convergence (FMC) market, where consumers use a single device to make calls over both mobile and landline networks. The combined company will also allow the pair to offer quadruple-play services of TV, broadband access, fixed and mobile telecoms;

• the move was a necessary competitive response by the two companies to the recent merger between Alcatel and Lucent, which are dominant players along with Ericsson;

• based on current market share data, Nokia Siemens Networks will be the second largest global company in mobile infrastructure, second in services, third in fixed infrastructure, and the third largest in the overall telecommunications infrastructure market.

• to counter act the threats from increased competition from new low cost Asian competitors like Huawei Technologies and ZTE who are already putting pressure on price margins in the industry;
• the new company will be able to take on and win against more established competitors;
• the deal addresses the need for both companies to achieve global scale and geographical diversity;

• the proposed deal is viewed as a defensive move where both Nokia and Siemens are buying market share and dealing with industry consolidation;
• In particular the move fits in with Siemens’s ongoing restructuring efforts. The Munich-based company is in the process of overhauling its communications division, which includes its troubled enterprise services business and Siemens Business Services.
• The tie-up of the two businesses would eliminate overlapping functions, better utilisation of sales and marketing organisations, reduction of overhead costs, improved sourcing and more efficient research and development;
• Telecom Trends International Inc. estimates that the formation of Nokia Siemens Networks will propel the new company into the No. 2 role in mobile infrastructure, with a 23.7 percent market share, following LM Ericsson at 25.9 percent;

• Nokia’s “A-list” presence in 3G services will be augmented by Siemens’ strong core-networking wireline business with Nokia gaining from Siemens’ experience in fixed line, Siemens from Nokia’s management experience;

• the move was risky due to Nokia’s lack of a fixed-line presence but added the benefits of scale will help both companies and

• Nokia’s management will be tasked with turning around a business that Siemens’ management have been trying to turn around for five years.

The following are some comments from the analysts:

• The telecom industry was rife with speculation about more mergers after the news that Nokia and Siemens AGwill combine their telecommunications infrastructure-related businesses to form a $20 billion venture. A round of consolidation involving Motorola, Nortel and China’s Huawei is possible, according to industry watchers;

• predicted that following Ericsson’s acquisition of Marconi Communications and the Alcatel-Lucent, Motorola and Nortel will be forced into a merger or alliance if they want to survive in the new competitive environment of wireless infrastructure;Siemens needed to act and this makes a lot of sense for them to create a large, credible player in the telecoms equipment space;

• The corporate cultures at Nokia and Siemens should also be a better fit than if Nokia had found transatlantic partners such as Motorola or Nortel Networks;
• Nokia will also gain from Siemens’s expertise in the fixed-line area.

• Siemens needed to make the move more urgently than Nokia. Siemens has long been looking for a partner for its troubled telecoms division, 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 telecoms market after selling the handsets business to BenQ”, said one stock market trader. Siemens shares soaring 5.44 euros or 8.66% 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.

Merger to complete by:

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.

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