June 22, 2009 / 12:54 PM / 10 years ago

NSN's Nortel deal may be too little, too late

HELSINKI (Reuters) - Nokia Siemens Networks’ acquisition of key assets from Nortel Networks NT.TO is unlikely to be a game changer in a cut-throat telecom operators’ market, even if the deal helps NSN’s results and market share.

A Nortel sign is seen in downtown Toronto February 27, 2008. REUTERS/Mark Blinch

On Friday, bankrupt Nortel and Nokia Siemens NSN.UL unveiled the $650 million deal, which includes Nortel’s global No 2 position in CDMA technology, and its assets in upcoming LTE technology.

The acquisition will propel Nokia Siemens into the number-two position in the CDMA market, challenging market leader Alcatel-Lucent ALUA.PA.

But it runs the risk of distracting management at a time when the merged network businesses of Nokia NOK1V.HE and Siemens (SIEGn.DE) were starting to settle down.

Nokia Siemens is looking to directly benefit from Nortel’s North American exposure to CDMA market, the technology which lost the battle for global dominance but still has a strong position in North America.

Analysts expect investments into CDMA networks to continue, albeit at a somewhat slower pace due to the economic slowdown, but CDMA operators are set to upgrade their networks in coming years — many of them looking at the new high-speed LTE technology.

LTE networks are slated to be deployed in the coming years by large wireless telecommunications carriers including Vodafone Group Plc (VOD.L) and Verizon Wireless, a joint venture of Vodafone and Verizon Communications Inc (VZ.N).

Analysts said the deal would be good for NSN’s financials but was too late to make a huge difference.

“The acquisition of Nortel’s Wireless infrastructure businesses makes financial sense but the strategic reason to buy the CDMA and LTE wireless business has long departed,” Nomura technology specialist Richard Windsor said in a note.

Verizon, one of Nortel’s top customers, has already decided to have Alcatel-Lucent and Ericsson (ERICb.ST) build its LTE network instead of Nortel, since Nortel’s announcement it was filing for bankruptcy protection.

Nokia shares were down 3.3 percent at 10.40 euros at 1230 GMT.

The deal will give Nokia Siemens access to Nortel’s clients — Verizon (VZ.N), Sprint (S.N), Telus (T.TO) and Bell Canada — all of which endorsed the deal in the companies’ joint statement of the deal.

ANOTHER BLOW FOR ALCATEL

The deal will most directly hurt Alcatel-Lucent, the market leader in CDMA technology, which will miss an opportunity to gain share.

“It is a negative for Alcatel-Lucent,” said Bernstein analyst Pierre Ferragu, adding that Ericsson and NSN were likely to capture a greater share of the CDMA footprint.

Nortel saw its market share in CDMA business declining to 22.8 percent in January-March quarter from 35.3 percent in the same quarter a year earlier. Its overall global market share halved to 4 percent, according to research firm Dell’Oro.

Alcatel-Lucent dominates the CDMA market with a roughly 40 percent stake.

The telecom equipment industry is consolidating and leaving only a few global players — market leader Ericsson (ERICb.ST), aggressive newcomer Huawei HWT.UL, Nokia Siemens and Alcatel-Lucent.

The market has seen cut-throat competition for new business during the past few years, driven by Asian vendors, and the outlook remains tough. Alcatel-Lucent has forecast the market to shrink 8-12 percent in 2009, while Nokia Siemens has said the market would fall some 10 percent.

Both Nokia Siemens and Nortel have seen their market share shrinking fast as both have shied away from the toughest price wars.

In an industry where changes in market shares have been slow and small, the two firms combined saw their market share shrinking to 25 percent in the first quarter, from 32 percent a year earlier, according to research firm Dell’Oro.

Nortel, once the largest North American maker of telecommunications gear, filed for Chapter 11 bankruptcy protection in U.S. federal court and for creditor protection in Canada’s Ontario Superior Court of Justice in January.

In spite of all the problems, Nortel’s Carrier Networks unit — which includes the parts Nokia Siemens is buying — reported last year underlying operating profit (EBIT) margin rising to 20.1 percent from 18.7 percent.

Nokia Siemens made another loss in January-March. It has earlier said it aims to reach an underlying EBIT margin of 10 percent.

Editing by Sitaraman Shankar and Georgina Prodhan

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