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Motorola No Match: Nokia-Siemens Wireless Phone Equipment Combination to Add to Market Pressure

Posted on: Tuesday, 20 June 2006, 09:00 CDT

By Mike Hughlett, Chicago Tribune

Jun. 20--Consolidation has finally come to the wireless phone equipment business, but it has left Schaumburg-based Motorola Inc. on the sidelines, a niche player in a market increasingly dominated by giants.

Finland's Nokia and Germany's Siemens announced Monday a blockbuster $30 billion pairing of their phone equipment operations, following by a few months the marriage of equipment vendors Alcatel and Lucent Technologies.

When the dust settles, the three biggest wireless equipment makers will control over 60 percent of the world market, while Motorola and Canada-based Nortel Networks--relegated to second-tier status--will come under even more competitive pressure, analysts say.

"Scale will matter and they (Motorola) obviously don't have scale," said Mike Walkley, a stock analyst at Minneapolis-based Piper Jaffray.

To get scale, Motorola could combine its phone equipment business with Nortel's, though analysts say that's a long shot.

Lacking scale, Motorola could sell its equipment business, which accounted for $6.3 billion or 17 percent of Motorola's 2005 sales. But several analysts said they didn't see that as likely, either, at least in the short term.

Instead, they expect Motorola to concentrate in niche equipment areas where it's strong--including coming technologies like WiMax and Wi-Fi--making small acquisitions along the way.

Meanwhile, to stay competitive with the new behemoths, Motorola is likely to cut costs--and that will likely mean employees--in its wireless equipment unit, said Ed Snyder, a stock analyst at Charter Equity Research.

Motorola declined to make the head of its networks business available for an interview, saying it doesn't typically provide comments on what its competition is doing.

A German newspaper had reported earlier this year that Motorola was talking with Siemens about a combination. But Motorola has been reticent to make big deals, which can be notoriously tricky to execute.

Motorola's stock shrugged at Monday's news: It closed at $20.02, down 6 cents on a down day for the stock market generally.

Motorola is best known as the world's second-largest mobile phone-maker, though it has long had a presence in equipment.

The equipment business lacks glitz: After all, infrastructure--"radio base stations" and the like--just isn't going to get ink like a snazzy new mobile phone.

But wireless equipment is a $66 billion industry globally, and it is every bit as competitive as the handset business. It has long been a fragmented industry, led by the Swedish company L.M. Ericsson, with Nokia second. (Nokia is the world's largest cell phone-maker).

Consolidation speculation has been simmering for two years. First, the equipment vendors' main customers, the wireless phone networks, have also been consolidating. Those surviving networks have more bargaining power with equipment makers.

Second, the networks business has become more competitive as Chinese equipment makers have moved beyond their domestic market and into exports.

So, it wasn't surprising when the British Marconi Corp. said last fall it would sell its telecom assets to Ericsson for about $2 billion.

Then in April, a far bigger deal was unveiled: the $13 billion combination of New Jersey-based Lucent and France's Alcatel. That deal combined two middle-of-the pack equipment-makers into a formidable force.

Now comes the Nokia-Siemens deal, a 50-50 joint venture that will be called Nokia Siemens Networks. It will be an instant giant, with about 23 percent of the world's wireless equipment market, just short of Ericsson's 25 percent, said Piper Jaffray's Walkley.

The combination of Alcatel and Lucent would be next with about 16 percent, he said. Nortel and Motorola have 8 percent and 7 percent, respectively.

A Nortel-Motorola combination is unlikely for several reasons, analysts said.

One is simply that Nortel is still in turnaround mode, mending from an accounting scandal. Motorola might not want the hassle. Besides, Nortel's board last fall hired Mike Zafirovski, Motorola's former No. 2 executive, to revamp the company.

From the board's perspective, Charter Equity's Snyder said of Zafirovski, "You want to let him do his thing."

Size matters in phone networks, as in other businesses, because it allows for economies of scale. "It puts your smaller players at a disadvantage," said Paul Dittner, a North Carolina-based wireless network analyst.

Larger companies can spread overhead and research costs over more revenues. And research costs are substantial in telecom equipment, Dittner said.

Just four years ago, Motorola's wireless equipment division was losing money and on the sales block. In fact, the company had talked with Siemens about swapping its equipment division for the German firm's cell phone operation (which Siemens has since sold).

But Motorola's equipment division had rebounded by 2004. "Over the past few years, they were able to turn around the division and do quite well until the two recent quarters," Dittner said.

During the last two quarters, the equipment division's profits and sales were lower than expected.

Also, Motorola in March announced it would combine its networks operation with its "government and enterprise unit," which makes emergency communications networks. The firm said Adrian Nemcek, the 59-year-old head of networks, would retire.

In an April conference call with analysts, Motorola Chief Executive Edward Zander called the networks division's first-quarter performance "a big disappointment."

But he didn't think it was suffering from systemic problems. "I still think this is a very good business," Zander said then.

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WIRELESS TELECOM EQUIPMENT MAKERS

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Copyright (c) 2006, Chicago Tribune

Distributed by Knight Ridder/Tribune Business News.

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NYSE:MOT, NYSE:NOK, NYSE:ALA, NYSE:LU, NYSE:NT, NYSE:PJC,

Source: Chicago Tribune

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