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Nokia strives for dominance of network market through fusion with Siemens
Nokia CEO Kallasvuo: "This is fantastically exciting"
Finnish mobile phone giant Nokia and German Siemens are looking for dominance of the network market through the merger of their telecommunications network operations into a new company called Nokia Siemens Networks, as announced on Monday. The new player in the field is only slightly smaller than the present market leaders, the recently merged Lucent-Alcatel and Sweden's Ericsson.
Nokia, which has already ensured clear domination in the mobile handset trade with a market share covering a third of global sales, is now aspiring to become number one in the network operations market as well.
"This is fantastically exciting. We are now in a situation where our networks arm can genuinely become a market leader. There was a danger that Nokia Networks might be lacking in size to have the potential to invest sufficiently in research and development. Now the situation is radically different", Nokia CEO Olli-Pekka Kallasvuo told Helsingin Sanomat, when interviewed over the phone from Germany.
Formally the merger will result in an equal-partnership consortium, but in practice the new company will be clearly under Nokia's control. Simon Beresford-Wylie of Nokia Networks will become its chief executive, while Nokia CEO Kallasvuo will take over the role as the chairman of the board. The majority of seats on the board of Nokia Siemens Networks will also go to Nokia people.
The headquarters of the company will be set up in the Helsinki region, and the company will become part of Nokia - in other words, its net sales will be included in Nokia's turnover figures. Siemens will in turn reap half of the profits.
According to Kallasvuo, the arrangement will first and foremost aid Nokia in gaining customers and growing in size to enable investments. "Actually it is quite strange how little there is by way of overlapping in our customer bases", Kallasvuo stated.
In Kallasvuo's view, the new player is strategically positioned with regard to the future world, where mobile and fixed networks are starting to converge.
In the fastest-growing sector, which is the mobile networks infrastructure and services, Nokia Siemens Networks will be right behind the market leader Ericsson.
"The new company's innovative ability will be second to none. At Nokia, we have always admired Siemens's research and development", Kallasvuo revealed.
In respect of net sales and personnel, Nokia's fifty-fifty share is more than generous. Only a third of the joint venture's 60,000 employees come from Nokia.
Last year, Siemens' carrier-related operations for fixed and mobile networks amassed net sales of EUR 9.2 billion, against Nokia Networks' EUR 6.6 billion.
In terms of total business result, however, Nokia far outruns its German counterpart, for which reason both partners were regarded as equal in the fusion.
"The Siemens logic is that the value of ownership increases in the joint enterprise, when the network operations' profitability improves. In the future, Siemens may get a better prize for its share of the company", argues analyst Eric Sucksdorff of FIM Securities.
It is probable that in the future Siemens will reduce its ownership of the company, as recently the German firm has systematically proceeded to rid itself of its telecommunications business arm. Last year Siemens already sold its mobile handset division to the Taiwanese BenQ company.
After the fusion with Nokia, Siemens will still own another division providing company networks, which it aims to divest in the not too distant future.
According to Kallasvuo, options of selling or buying shares were not included in the fusion agreement; in other words, provisions were not made for immediate changes of ownership.
"Both partners are dedicated to developing the company", he said.
Nokia and Siemens promise that the joint venture will bring in its wake annual savings in the region of EUR 1.5 billion. Already next year, the merger should reflect positively in the companies' results per share. The operating profit is promised to exceed ten percent.
Heavy restructuring is also in the offing, with up to 9,000 jobs being cut between the two firms.
The profit targets seem optimistic. Last year, Siemens' operating profit percentage was 3.5 and Nokia's 13, but even that has been going down during the first part of 2006.
Kallasvuo is not afraid of a cultural clash between the two firms. "We are similar kind of engineer houses with uniform pragmatic business approaches that seem to resonate well."
The merger still needs to be ratified by competition authorities. Nokia Siemens Networks should be up and running at the beginning of 2007.