Nokia, Siemens to merge units

The merger is likely to set off a new global wave of consolidation and a round of price wars as the telecommunication industry continues to remake itself after last decade's boom-and-bust cycle.

The cross-border deal, which was approved by the boards of both companies, would create the world's third-largest network equipment concern behind Ericsson and a combined Lucent and Alcatel, which announced plans to merge three months ago. The transaction is also likely to put considerable pressure on Motorola, which will fall to No. 4 network equipment maker in the world, just as its business is turning around as a result of its hot-selling Razr cell phones.

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The network equipment industry makes and operates the fiber optic cables, routers and wireless beacons that act as the backbone of the communications world for telecommunications carriers like Cingular and Verizon. While Nokia's cellphone business will remain largely unaffected as a result of the deal, it could use the combination to provide network equipment to carriers that includes advanced features for its phones.

Motorloa has been able to couple its network equipment for Nextel, which is now part of Sprint, with technology for its walkie-talkie handsets with much success.

The deal involves creating a new company that both Nokia and Siemens will merge their network equipment businesses into, the people involved in the transaction said. It is being structured somewhat like a joint venture because both companies will own the business, they said.

Analysts have been predicting mergers between the largest telecommunications equipment makers in the half-decade since the Internet bubble collapsed. As wireless and conventional phone companies merged and the binge in spending on state-of-the-art fiber optic networks subsided, carriers slashed their budgets for new equipment.

At the same time, new low-cost competitors entered the market, particularly from Asia. Huawei, for instance, has been able to win contracts in Asia in places where Lucent and others had previously been successful.

Siemens was particularly vulnerable. The company sold its cellphone handset division to BenQ of Taiwan last summer. BenQ still uses the Siemens brand name and Siemens factories in Germany, but the Taiwanese company ultimately hopes to build a brand of its own.

With its retail presence diminished and prices for network equipment falling, Siemens was long thought by industry analysts to be considering ways to cushion itself an increasingly volatile market. The company sells equipment to wireless carriers like Cingular in the United States.

Siemens is also likely to face increased pressure when Alcatel and Lucent complete their merger because Alcatel provides GSM wireless technology and Lucent is a leader in the rival CDMA technology. With Siemens joining forces with Nokia, the combined company will have more money to develop products and additional customers.

At the same time, Nokia has been looking to strengthen its network business to compete better with Motorola, analysts said.

Both companies are also likely to compete for contracts in developing countries in Africa and Latin America, where wireless networks are still being expanded.

A deal between Nokia and Siemens leaves open the question of what will happen to Nortel, the Canadian network equipment maker. The company has weathered several years of accounting troubles and its stock has been pummeled during that time. Nortel is one of the largest on the Toronto Stock Exchange and Canadian officials might be reluctant to see the company fall into foreign hands.

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