First Coffee for 19 June 2006: Nokia, Siemens To Merge Telephone Equipment Units

David Sims : First Coffee
David Sims
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First Coffee for 19 June 2006: Nokia, Siemens To Merge Telephone Equipment Units

By David Sims

The news as of the first coffee this morning, and the music is The Allman Brothers’ Hittin’ the Note:

Nokia Corp. and Siemens AG have “agreed to combine their telephone equipment units in a deal valued at roughly $31.6 billion,” according to somebody at the Associated Press retyping a The Wall Street Journal article…

Well, heck, First Coffee subscribes to The Wall Street Journal, we can sit and read the article together here over our morning espresso as well as any AP reporter:

Nokia Corp. and Siemens AG, accelerating consolidation in the telecom industry, agreed last night to combine their phone-equipment units into a joint venture with assets valued at about €25 billion – or more than $30 billion – people familiar with the matter said.

The two European technology giants are expected to announce the deal today, these people said. If completed, the transaction would create one of the global industry’s biggest players.

As currently planned, both companies would contribute their network-equipment operations to the new venture, in which each would get a 50% stake. The venture would be based in Nokia’s homeland of Finland, and Nokia would receive a majority of the venture’s board seats, people close to the talks said.

Nokia executive Simon Beresford-Wylie would serve as chief executive of the venture, these people said. Siemens, which is based in Germany, is expected to play a smaller role in management of the new company.

Nokia couldn’t be reached for comment. Siemens declined to comment..

… A combination of the two companies’ telecom-equipment units would be roughly equal in size to European competitor Telefon AB L.M. Ericsson of Sweden and the combined Lucent-Alcatel.

Thanks to the WSJ for that exclusive, First Coffee hereby awards you another hazelnut latte, guys, job well done. That’s why we pay $99 a year for your schizophrenic amalgam of left-wing news and sensible, level-headed commentary.

The article goes on to say that “Nokia and Siemens have come under pressure from lower-cost Asian rivals as well as from consolidation among their main customers – the phone companies that operate the world’s communications networks. By cutting duplicated research and development costs and other expenses, the combination could save the two companies a total of as much as €1.25 billion annually, according to people familiar with the matter.”

Sure helps to have People Close To The Talks or People Familiar With The Matter if you want to work for The Wall Street Journal, doesn’t it? First Coffee has some P.F.W.T.M., but they’re usually more familiar with what Mummy’s making for dinner tonight or why the suspiciously wet cat was doing all that screeching in the bathroom just a little while ago.

As the WSJ’s P.F.W.T.M. say, Nokia-Siemens would be a bit more exotic than your average, everyday, humdrum multibillion-dollar merger, since Nokia, the world’s dominant maker of cellphone hand-sets, “has shied away from big mergers. For Siemens, it would be a similarly aggressive step: The company, a stalwart of German industry, hasn’t participated in the global merger game in a major way so far.”

The Journal’s – we anointed Industry Insiders can call it “the Journal,” sometimes without even capitalizing “The,” but non-qualified civilians shouldn’t presume such jocular usage without express written permission – P.F.W.T.M. finger Chinese providers as the driving force behind the merger: “The sale of global cellular operator Millicom International Cellular SA of Luxembourg to China Mobile Ltd. of Beijing for more than $5 billion, which is expected to be announced soon, illustrates the ambition of the new Asian players.”

In other words, Chinese competition is expected to be as cheap and stiff as a secondhand polyester suit, so merge or die: “By combining their equipment businesses, Siemens and Nokia hope to mount a more robust defense against the threat to their global market share posed by their new Asian rivals.”

P.F.W.T.M. also privately whisper that, well, Nokia’s been missing a few steps here recently, feels Motorola breathing down its neck, and once that biological clock starts ticking you know what happens, guys you wouldn’t let buy you a Mai Tai a few years ago get a bit longer, more appreciative glances and maybe a quick glance at your etchings.

Not that the guy’s exactly Brad Ridgerock fresh from the cover of People magazine himself, as the Journal points out, Siemens’ CEO Klaus Kleinfeld “sold the telecommunications unit’s mobile hand-set business to Taiwan’s BenQ Corp., actually paying BenQ to take the money-losing division off his hands.”

Siemens’s telecommunications unit “has struggled in recent years, and has been rumored to be on the block for months. Mr. Kleinfeld referred to it last year as one of the company’s ‘problem children.’”

Basically, things are getting leaner and more shipshape around Siemens, and problem children need to shape up or ship out – “last year the telecommunications unit posted a profit margin of 3.5%, far below the 8% to 11% margin that management has been targeting,” the Journal said. “Mr. Kleinfeld has said that each of Siemens’s 12 units – which span such areas as power generation, transportation and medical equipment – must reach their margin targets by the spring of 2007.”

Sounds good, but “the telecommunications unit has continued to struggle, despite management shake-ups and smaller restructuring steps. In April, Mr. Kleinfeld signaled there would more job cuts at the unit and acknowledged that it still faced “huge challenges.” The merger with Nokia suggests that Mr. Kleinfeld – supported by the company’s powerful supervisory board – finally concluded that it couldn’t turn the business around on its own anytime soon.”

The Chinese company specifically mentioned by the Journal as attacking the European markets is telecommunications-equipment maker Huawei Technologies Co., which earlier this month “reached a preliminary deal to buy most of the assets of smaller rival Harbour Networks Holdings Ltd., according to executives at the two Chinese companies,” according to the Journal’s Jason Dean, a deal which, “if finalized… would expand fast-growing Huawei’s presence in the market for data-network gear.”

Huawei, unlisted “but based in the southern city of Shenzhen, is one of China’s biggest telecom-equipment makers as it reported sales of $5.68 billion last year. It sells data-networking gear, in part through a joint venture with 3Com Corp., in addition to cellular phone network equipment and other products,” Dean reports.

Another Chinese manufacturer to watch is ZTE, but don’t look for immediate world domination any time soon: the company “reported lackluster growth in sales and profit for 2005 as its product mix shifted,” the Journal reported a couple months ago.

“The push to boost exports at ZTE and Huawei Technologies Co., China’s other sizable telecom-equipment maker, is putting pressure on more-established, larger manufacturers based in North America and Europe,” the Journal observes, while noticing that “the competition is chiefly in developing markets, particularly in Asia and Africa. Less than 2% of ZTE’s revenue came from North America and Europe. Exports accounted for 36% of revenue last year, up from 21% in 2004.”

So not exactly a Yellow Peril swooping down on through a defenseless Europe, but enough of a threat to make Europe sit up and take notice. First Coffee thinks of the American car industry, may it rest in peace, which was forced to either adapt or die to the Asian efficiency challenge of the 1980s, and shortly thereafter was found by the side of the road with all four paws sticking up in the air and Toyota tire tracks across its butt.

First Coffee also wonders about the strategy of consolidating into Biggerness at a time when aggressive innovation and risk-taking seem to be called for. Running back to hold the fort is pretty much an admission that you’re not going to advance anytime soon, that you’re ceding the battlefield to an enemy who’s outfoxed or outfought you, and you’re just holding on until the end comes. Armies hunkered down in the fort aren’t known for creative, winning innovation, it’s the guys under fire in the field who generally do that.

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