Together We Can

In the last two years, the worldwide communications industry has witnessed a
phenomenal shift. It is more towards increasing area of operations, both
geographically and technologically. The easiest route that companies are opting
for is mergers and acquisitions. Not only does it help increase the company's
turnover, it also helps in getting the required skill sets, which would
otherwise take years to develop using its own R&D setup.

The process of acquisition started with the carriers and later activated
mobile handset vendors. Presently, it is the carrier equipment vendors who are
witnessing large acquisitions. Ericsson set the ball rolling with the
acquisition of Marconi's telecom business on October 25, 2005. This followed
Alcatel and Lucent entering into a definitive merger agreement on April 2, 2006,
to create the first truly global communications solutions provider with broadest
wireless, wireline and services portfolio in the industry. Later on June 19,
2006, Nokia and Siemens announced that they planned to merge the Network
Business Group of Nokia and the carrier-related operations of Siemens into a new
company called Nokia Siemens Network. This process is likely to continue in
future as we expect some more mergers and acquisitions to happen. The
anticipation is such that any new announcement leads to further speculation.

Why M&As?

In next five years, the communications infrastructure and services market is
expected to touch ¤130 bn, and is expected to grow at healthy CAGR due to 3G,
fixed mobile convergence, and next generation networks. Large scale deployment
of 3G in India and China will also help boost the worldwide infrastructure
market. All this is forcing vendors to align themselves to encash on future
opportunities, both in terms of equipment as well as services since network
transformation has just begun.       

With carriers being acquired, vendors always have the fear of losing the
contracts, as one loss is worth several billion dollars. Apart from this, the
companies are cut off from their clients for a period of 2-3 years as the
contracts are now valid for that long. So, if the company loses one or more such
contracts, it affects its topline. This fear of losing long- term contracts with
large carriers is forcing companies to go in for either mergers or acquisitions.
This helps them consolidate their operations and gear up for the future.        

Carriers are also opting for managed services and are focusing more on
marketing of services. Service providers are also opting for complete packages
for both wireless and wireline. So, in order to provide managed services,
companies have to provide a complete set of solutions rather than partial
solutions. Managed services also help carriers in terms of cost reduction in
capex and opex but it puts a lot of pressure on vendors for developing solutions
which can be leveraged later. And for all this, a strong partner is an absolute
must, as it gives confidence to carriers that any future upgradation will be
beneficial and will pay off in the long run.    

With networks becoming complex, vendors are planning to reduce their R&D
budgets or planning to leverage through acquisitions or mergers. This is because
future networks would be more complex and would require a lot of R&D
expenditure. Mergers and acquisitions will help companies leverage each
other's strengths and will help in moving with a complete portfolio both in
the mobile as well as fixed services. Even convergence is increasing the R&D
budget of vendors thereby affecting bottomlines. Apart from this, the companies
have to launch their products in time so that they can have an edge over others,
both in terms of breadth of products as well as depth in services.  

All this is leading to new business models that are still not tried and
tested. And with large companies merging or acquiring, the vendors are reducing
their risk and playing safe so that they can adapt to new conditions with the
combined strength.

Mergers and Acquisitions

Nokia-Siemens Announcement June 19, 2006

Simon Beresford-Wylie CEO* Status: Merger Time: Expected to close before January 1, 2007 Headcount: Approx 60,000 Combined Revenues: ¤15.8 bn Market Capitalization: ¤20.4 bn Strategic fit for Nokia and Siemens: Will help in creating a global leader with strong positions in both fixed and mobile space. It will also help in developing cost saving products and services via its scale and global reach. The new entity is expected to have cost synergies of ¤1.5 bn annually by 2010, of which a substantial portion (approx 90%) will be realized in the first two years after closing of the deal.

Alcatel-Lucent Announcement April 2, 2006

Patricia F Russo CEO* Status: Merger/Acquisition Time: Expected to close within 6-12 months Headcount: Approx 23,490 Combined Revenues: ¤21 bn Market Capitalization: ¤30 bn Strategic fit for Alcatel and Lucent: The Alcatel-Lucent combine will be global in scale, have clear leadership in the areas that will define next-generation networks, boast one of the largest research and development capabilities focused on communications, and employ the largest and most experienced global services team in the industry. The new entity will offer integrated end to end solutions and plans to leverage on Bell Labs R&D portfolio for next generation networks The combined entity is a leader in wireline, number two in mobility and services.

Ericsson-Marconi Announcement October 25, 2005

Carl Henric Svanberg president and ceo Status: Acquisition Time: Completed in January, 2006 Headcount: 61,855 Acquisition cost: ¤1.76 bn Combined Revenues: ¤17.9 bn Strategic fit for Ericsson and Marconi: The latter has a strong position in optical networking and has a good track on innovation thereby adding strength to Ericsson's next generation network strategy. The acquisition will also be helpful in strengthening Ericsson's position in the transmission space. The combined customer base will have access to a more a comprehensive portfolio of solutions and will also benefit from an expanded R&D capability. The acquired businesses are generally well aligned with Ericsson's existing operations, making the integration relatively straightforward.

How are Companies Benefiting?   

Mergers and acquisitions will help companies encash on future
opportunities, get orders from merged carriers, provide complete solutions, and
help them focus on core by providing managed services, and also help in cutting
R&D costs. Apart from this, it will also help in providing breadth as well
as depth of products plus services thereby, eliminating the missing links. By
looking at Ericsson's Marconi acquisition, Alcatel-Lucent merger, and
Nokia-Siemens merger, we can gauge how the new entities benefit?

Ericsson's Marconi acquisition will help the former strengthen its position
in the transmission space. It will also help in fixed and mobile services
convergence, as carriers will benefit a lot from this combination. For eg,
Marconi's transmission offering coupled with Ericsson's strong microwave
radio will benefit carriers considerably. The combined portfolio increases
Ericsson's market share globally in fixed broadband access to number two in
Europe and number three worldwide.

Mobile and fixed broadband is the new buzzword, and Ericsson is leading the
build out of mobile broadband, even as it leads in the fixed business. The
upgrade to broadband will lead to a massive increase in data traffic. This, in
turn, will lead to a dramatic increase in transmission capacity of carriers.
Therefore, Ericsson's fixed network business combined with Marconi's
broadband offerings will help in reinforcing Ericsson's market position in the
converged space. So, not only carriers will benefit out of this deal but the
companies will benefit too from an expanded R&D capability.

Having known each other well for the last ten years, Marconi's acquisition
has been well received by the customers, as Ericsson had a solid start with
early wins in Europe.

The merger of Alcatel and Lucent will help create a global convergence leader
with most comprehensive wireless, wireline and services portfolio in the
industry. The combine will help in generating significant growth in revenue and
earnings from next generation networks, services and applications.

In terms of geography, Alcatel is strong in Europe whereas Lucent is strong
in North America. The combined entity will be a force to reckon with in both
Europe and North America.

On the R&D front, Alcatel-Lucent will have a comprehensive R&D
portfolio leveraging on Bell labs lineage as it will have a combined patent of
around 25,000. Even on the next generation networks or converged networks, the
combined entity will have an edge over others as Bell Labs has a lot many
patents in this arena. 

Coming together of Nokia's Network Business Group and carrier related
operations of Siemens will help in creating a powerful company with strong
positions in fixed, mobile and services space. The combined entity will also
help in developing revenue-generating and cost-saving products and services with
the world's best research and development teams. The new entity will also have
a world-class fixed-mobile convergence capability, a complementary global base
of customers, and a deep presence in both developed and emerging markets. All
this will directly or indirectly benefit shareholders in terms of wealth
creation.

Not only will it help in lowering customer costs but also help in managing
new converged technologies faster, and also improve profits. Based on the
current market share data, Nokia Siemens Networks will be the second largest
company in mobile infrastructure, second in services, third in fixed
infrastructure, and third largest in the overall telecommunications
infrastructure market. This would help both companies make a quantum jump from
their present positions. This will contribute to strong cash flow generation,
and help Nokia Siemens Networks to grow faster than the market. 

It seems all mergers have paved the way for future mergers and acquisitions
for those players who are still trying to figure out how to move and respond to
the earlier mergers. It is expected that one will see few more M&As in the
near future. On the other hand, it would be interesting to see how large
companies do their integration, a task considered not easy by management gurus.
But the real winner will be the one where integration is smooth and regulatory
clearances come in time.

Pravin Prashant

pravinp@cybermedia.co.in