Business, Enterprise

Nokia Siemens to buy Nortel wireless units


Nokia Siemens Networks [NSN], the Finnish-German joint venture between Nokia and Siemens, said Saturday it will buy the CDMA and LTE assets of the Canadian-based Nortel Networks in a € 465 million [$650 million] deal to strengthen its position in North American markets.

Nortel has fallen from a $385 billion (Canadian) valuation in 2000 to trading for pennies on the Toronto Stock Exchange (TSX) near the end of 2008. Over the past two years, they had a reported total of $7 billion (USD) in losses. In January, Nortel filed for bankruptcy protection in Canada and the United States. Then, the so-called experts expected that Nortel would look to sell off its assets very quickly. Their indecision and delays will now cost Nortel hundreds of millions. In March-April, Nokia Siemens Networks bid for the same assets, which Nortel rejected. Now, rumors are that the previous offer was in the range of $850 million (USD).  

Nortel’s wireless business is the second largest supplier of CDMA infrastructure in the world. It does business with three of the five top CDMA operators globally, including Verizon Wireless, which operates the largest wireless voice and data network in the United States[always will be disputed]. CDMA, or code division multiple access, is a rival standard to the dominant cellular standard GSM, or global system for mobile, while Long Term Evolution, or LTE, is a next-generation [or 4G] wireless network technology.

The deal would give NSN access to the US market it has been seeking. The Wall Street Journal article says that sources close to Verizon have indicated that Verizon Wireless, which has already selected Alcatel-Lucent and Starent Networks for its LTE buildout, might be open to adding a third vendor – if that vendor were to acquire Nortel’s CDMA unit.

Sprint also uses the CDMA protocol for their network which just announced the Palm Pre as a contender for the Apple iPod-AT&T network’s number one US cellular phone sales position. Dan Hesse, CEO of Kansas-based Sprint Nextel, said that the news eliminates industry uncertainty and enhances CDMA for today and into the future.

NSN will also have positioned itself as a contender for LTE contracts across the globe, as more and more wireless carriers look to build for the future. LTE seemingly is the pathway of choice, over competing WiMAX technology (a business which Nortel exited at the end of January). The 400-person research unit included in the deal specializes in LTE development.

Under the deal more than 2,500 Nortel employees, mostly in Canada and the United States, would be transferred to Nokia Siemens Networks. Canada’s government-owned export credit agency, Export Development Canada, would support the transaction with a $300 million loan commitment, Nokia Siemens said.  

Nortel was founded in 1895 as Northern Electric and Manufacturing, a supplier of phones and other devices that spun off from Bell Telephone of Canada. In the 1960’s, they became one of the first companies to work with telephone companies and the, then, new fiber optic cabling. In 1976, the company changed its name to Northern Telecom and announced Digital World and DMS, a family of industry-leading digital telecommunications products. That product line was a mainstay of telephone company switching, and a cash cow for over 15 years.

Then, the acquisition bug bit Nortel and they started buying up companies. Their acquisitions were always large and often highly leveraged. That financial leveraging, and the downturn in the world’s economy, are what lead to their bankruptcy. In 1998, Nortel acquired Bay Networks for $9.1 billion (USD). Next, Nortel acquired software maker Clarify and Alteon Web Systems for a total of $10 billion (USD) in 1999 and 2000 respectively. Their buying spree continued with Cambrian Systems for $300 million, Shasta Networks for $340 million, all the way to DiamondWare (3-D stereo conferencing) and Pingtel (SIP software) in 2008.  

It is widely accepted that merging two companies of any size is never easy. Let alone seven acquisitions for nearly $22 billion (USD) in such a short time frame. Accenture is a specialist studying this problem. They have over twenty years’ experience and have looked at over 400 mergers and acquisitions.

Accenture agrees with a February 2003 Harvard Business Review article which says the results for an acquisition are determined by what is set up at the beginning. The biggest factor which leads to failure is cultural differences between the companies.

The same Harvard Business Review article says that in the first year of a merger or acquisition nearly 25 percent of the executives and other talented employees leave – three times the rate for a similar company without a merger. In the second year, an additional 15 percent leave, which is twice the normal rate. This high departure rate continues for up to nine years after a merger or acquisition. It is easy to see why Nortel floundered.

Trading in Nortel shares on the TSX is expected to be suspended (commencing before the opening of trading on Monday, 22 June 2009) with the consent of the Monitor under the Canadian creditor protection proceedings, pending the TSX’s decision on the delisting application.