Market Overview

Motorola over Nokia-Siemens Post Networks Transaction

Earlier today it was announced that Nokia-Siemens (NYSE: NOK, NYSE: SI) would be acquiring Motorola’s (NYSE: MOT) Networks business for $1.2 billion in cash. At first blush, the transaction, which has been the subject of much chatter over the last few weeks, is positive for Motorola and in our view neutral at best for Nokia.

We say positive for Motorola because it eliminates what has been a struggling business for more than a few years and should leave the soon to be stand-alone public-safety business in a much better position. The question that will be asked and will no doubt not be answered until the split between Motorola Mobility and Motorola Solutions is how the proceeds from the sales will be split between the two entities. We suspect that at least a portion of the proceeds will find its way into Motorola Mobility to help fund its R&D initiatives as well as other corporate activities.

With regard to Nokia-Siemens, it picks up a long sought after position in both the
Japanese and U.S. markets as Motorola’s mobile infrastructure business served more than 50 network operators globally including Verizon Wireless (NYSE: VZ) , Sprint-Nextel (NYSE: S) and KDDI (TYO: 9443) as well as Clearwire (NASDAQ: CLWR) , China Mobile (CHL) and Vodafone (VOD) among others. In our view, that customer base is perhaps the largest asset that Nokia-Siemens will garner from the transaction with its technology falling to a second or third consideration. While Motorola’s infrastructure business has its strong points – 41 WiMAX contracts in 21 countries, 30 active CDMA networks in 22 countries – its position in WCDMA and LTE trails that of other players, such as Ericsson (NASDAQ: ERIC), Alcatel Lucent (NYSE: ALU), and Huawei. Motorola is slated to keep its iDEN technology that powers “push to talk” offered primarily by Sprint-Nextel and NII Holdings (NASDAQ: NIHD).

While Nokia-Siemens will be gaining access to Motorola’s customer base, that does not guarantee success considering both Verizon Wireless and Vodafone have already selected Alcatel-Lucent and Ericsson for their 4G/LTE networks. Now consider that also as part of the transaction, Nokia-Siemens will be inheriting roughly 7,500 employees from Motorola's wireless network infrastructure business when the transaction closes toward the end of this year. Perhaps one other question whose answer will be determined later will be which entity lays claim to the wireless intellectual property and patents? Given what we have witnessed in recent months – from a growing number of companies suing one another to HP (NASDAQ: HPQ) acquiring Palm (NASDAQ: PALM) largely for the patent position – this answer will have repercussions later.

While we understand the argument of needed scale to compete in the mobile infrastructure market, we would question the ability to compete long-term. The combination of having to integrate the Motorola business into Nokia-Siemens while competing in a market whose customer base is shrinking is challenging enough. Add to this the cost differential between firms based in North America and Europe vs. those in China and in our view acquiring the Motorola business does not address the long term challenges that await Nokia-Siemens. Rather, we would put forth the notion that it will only accelerate the challenges to be faced.

As it is, Nokia-Siemens has been under pressure in recent quarters marked by negative revenue comparisons and at best near break-even performance on the operating line. Motorola’s mobile infrastructure business faced similar revenue pressure and per the company’s most recent 10Q in which it shared its expectations for “the overall 2G and 3G wireless infrastructure market to decline in 2010 compared to 2009” we would expect that pressure to continue.

In times past, Nokia was able to weather challenges in the mobile infrastructure business given its strong and profitable position in the mobile phone market. That has changed and now Nokia is under pressure in both businesses not counting this pending acquisition. While we hesitate to call Nokia desperate, we would agree that Motorola is the better of the two in this pending transaction.

 

Best,

 

Chris Versace

The Thematic Investor

Posted-In: Long Ideas M&A Movers Tech

 

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