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Nokia, Siemens Join Consolidation Wave

Consolidation continued its sweep across the global telecommunication industry today with Finnish phone giant Nokia  and German networking provider Siemens  teaming up their telecom-equipment businesses.

The 50-50 joint venture is expected to quicken the pace of convergence in global markets for fixed and mobile network infrastructure and services, while putting even more pressure on equipment-making rivals such as Alcatel , Cisco , and Nortel .

It will be called Nokia Siemens Networks and will consist of Nokia's Networks Business Group and the carrier-related operations of Siemens.

"This new company, in our view, will change the face of the whole industry," said Klaus Kleinfeld, CEO of Siemens. "We are seeing a new top-league player emerging" in the telecommunications equipment industry, he added during a press conference and Webcast today.

Olli-Pekka Kallasvuo, recently-named CEO of Nokia, said the partnership with Siemens is the most effective way to build the scale and broad product portfolio necessary to compete globally and create value for shareholders.

"The communications industry is converging, and a strong and independent Nokia Siemens Networks will be ideally positioned to help customers lower costs and grow revenue while managing the challenges of converging technology," he said as part of the announcement.

The new company is seen with a value of about $30 billion. The combined units had pro forma revenues of Euro $15.8 billion in 2005, or roughly U.S. $20 billion.

Three major industry drivers are behind the venture: the explosive growth of IP-based communications -- especially VoIP , the convergence of fixed mobile and wireline networks, and pressure from fast-growing Asian telecom providers and their ability to slash costs.

The new Asian competitors could present challenges or opportunities in the convergence of fixed and mobile networks, as well as in the convergence of voice, data and entertainment networks, Kallusvuo added.

Simon Beresford-Wylie, who will become CEO of the company, called it a historic day for both companies.

With its wireless and fixed business dominance, the new company has a "tremendous foundation to attack this converging market."

The opportunity is a large one, he added.

"We're in a great position to help our customers navigate convergence, meet the challenge of finding new revenues, lower costs, build end-user loyalty, and deal with the technological complexity" of those networks, he said during a press conference.

As voice, data and entertainment networks morph, the joint venture will be building and supplying networking gear that enables the so-called "quadruple play" products that offer voice, data, wireless and video across the networks.

The same forces helped spur France's $13.4 billion merger with U.S.-based Lucent Technologies. That new joint company, worth an estimated $25 billion, plans a European headquarters and about 8,000 job cuts.

And, like that merger, the Nokia/Siemens alliance will likely result in major job cuts across the entity, which counts about 60,000 employees in the combination. Officials said they expect a cut of up to 15 percent, or about 9,000 employees.

The new company, which will be based in Helsinki, would be just behind No. 1 provider Alcatel (after it finishes its merger with Lucent), and Ericsson , Beresford-Wylie noted.

Convergence has been wending its way through the industry since the dot-com bubble flattened many telecom players in early 2000.

The most recent deals include AT&T and BellSouth, which are also merging in a $67 billion stock deal. This follows AT&T's $16 billion merger with SBC in 2005.

The latest merger is likely to put pressure on other equipment providers to find merger partners, especially Nortel, which often comes up among industry-watchers as the one to watch in the consolidation dance.

If convergence of IP-networks is the main driver for deals such as these, VoIP might be called the fuel. It continues to gain traction in both business and home use.

A recent study by Infonetics Research predicted that VoIP service revenue in North America alone will grow 18-fold between 2004 and 2009, from $1.24 billion to $23.4 billion.

Further, more than $62 billion will be spent on VoIP services over the five-year forecast period.