Nokia Siemens Network Remains On the Hot Spot

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The joint venture between Nokia (NYSE: NOK) and Siemens (NYSE: SI) may end soon with the acquisition of Siemens’ stake in Nokia Siemens Networks (NSN) by Nokia. Nokia Siemens Networks, a multinational data networking and telecommunication equipment company offering a complete portfolio of mobile, fixed and converged network technology, may become fully owned by Nokia with a $2 billion euros ($2.6 billion) deal as reported by Bloomberg.

Sweet for Siemens, tough for Nokia?

Siemens, an integrated technology company with a market cap of over $85 billion, is focusing on its energy equipment, healthcare and rail divisions while trying to exit the wireless equipment business. By divesting its 49.9% stake in Nokia Siemens Networks, Siemens can reduce its volatility for its equity investments. While NSN has been restructuring and improving its competitiveness, it continues to operate in a challenging environment.

For Nokia, however, buying NSN at this moment is not like hitting a home run. With 20% declining sales for the first quarter due to strong competition from Asian manufacturers and suspension of its dividend for the first time, investors’ patience may run out soon. While Nokia is gaining good traction for its Lumia phones with the Nokia Lumia 520 on track to become the best-selling Windows Phone to date, it still has a tough time penetrating the U.S. market. Financially, Nokia still needs to preserve its capital to keep up with the competition and according to Bloomberg's report will use a bridge loan to help finance the purchase.

As quoted from Pierre Ferragu, an analyst at Sanford C. Bernstein, NSN will give Nokia “a more tangible long-term future for the group, but a tighter balance sheet for hardship to come.”

How is NSN doing? Competition or consolidation?

With continuous cost reduction and divestiture of non-core assets, NSN continues to improve its earnings after it returned to profit last year. NSN has sold off a unit that provides network equipment for wired networks and exited the market for WiMax as the company shifts its focus to 4G LTE market. It is also reported that NSN was in talks with various companies to sell its business support systems. On the positive side, NSN is on track to exceed its target savings of $1 billion euros in operating expenses by the end of 2013.

Earlier in February, there was a rumor that Alcatel-Lucent (NYSE: ALU), another struggling provider of telecommunications technology and services, might step in and buy into NSN. Despite the recent announcement of Alcatel-Lucent’s “Shift Plan” to reposition itself as an industrial specialist in the IP networking and both mobile and fixed ultra-broadband access markets, the company’s challenges remain. As a result, Alcatel-Lucent will need to shed cost continuously. A consolidation in the industry may be likely if both NSN and Alcatel-Lucent continue to rely on cost reduction to stay in the game.

Bottom line

By acquiring 100% ownership of NSN, Nokia will have more options for the network. Time may be quickly running out for Nokia if it cannot reverse its declining sales for its core revenues from mobile phones. For now, the deal to acquire all of NSN will give Nokia a lift, but Nokia’s core issues will still remain.

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