Nokia and Siemens: Exciting the Market
On June 19, Helsinki-based Nokia (NOK)and Munich-based Siemens (SI) announced they would combine their units that make equipment for telecommunications networks into a new 50-50 joint venture, Nokia Siemens Networks. If it goes as planned, the new company—with projected annual sales of $20 billion—will be in a better position to build market share in Asia and cope with technological shifts that are blurring the line between wireless and land line networks.
In a joint interview in Frankfurt, Siemens CEO Klaus Kleinfeld and Nokia CEO Olli-Pekka Kallasvuo spoke with BusinessWeek European Regional Editor Jack Ewing about the challenges of merging their two company cultures and coping in the ruthlessly fast-moving telecommunications business.Edited excerpts of their conversation follow:
Tell us a little about how the deal came together.
Kleinfeld: The [negotiating] teams really did an outstanding job. It was a tough negotiation—very tough. To have Germans and Finns at one negotiating table, I'm sure not many people would have survived that. But it's not worth going back into how this all came together. We are both happy that it came together.
What were the tough negotiating points?
Kallasvuo: I wouldn't say there was anything fundamental. But there is so much hard work, so much complexity, so much detail.
Kleinfeld: We both feel very committed to the communication business. That was the hardest thing for the two of us, to make sure we could continue to be as committed to the business and still form a venture.
You were both personally involved in the talks?
Kleinfeld: Oh, yes, Oh yes. I tell you. A transaction like this, without the two of us having a good understanding and a good chemistry…it would have killed it.
The studies all show that mergers often fall apart over cultural issues. Is that something you've thought about?
Kallasvuo: That's what you think about of course, it's one of the top things on your mind. If that foundation is not there then it's really difficult. The two companies know each other. We have been in the business for a long time. We both understand the dynamics of the business. We know how the other people work. And there are of course people who know each other. You have to believe there is commonality. There are values and cultures that are the same. They're both no-nonsense, straightforward, make-it-happen sort of cultures.
Kleinfeld: It is an engineering-driven, very international culture. It is a very execution-oriented one. That has been the spirit all along. We talked a lot about it, the cultural fit.
Do you see any cultural hurdles, is there anything you are planning to do to deal with any problems?
Kleinfeld: Yeah, we are preparing our team to stay longer in the sauna. We have heard from secret sources that some [Finns] are preparing to buy Lederhosen.
Did you actually spend time in the sauna during the negotiations?
Kallasvuo: No. That's out of fashion. Of course it would be completely wrong to say there are not issues you have to deal with in terms of culture. Two companies are always different. There's a lot on Simon [Beresford-Wylie, CEO of the new company]'s plate in this regard.
Kleinfeld: But he has our full trust. The [new management team] has a lot of freedom, because we want them to move fast. This industry is brutally fast.
Mr. Kleinfeld, it seems as if a big item on your Siemens to-do list has been taken care of. Would you agree?
Kleinfeld: It's an item and there are some more. But obviously I believe this was a unique opportunity to form a company I am fully convinced is playing in the top league of the industry. The product ranges fit extremely well together.
When you look at the markets we are catering to, we are already the clear No. 1 in Asia. I don't have to tell you that Asia is the market which is growing fastest. If you look on the mobile side for 3G infrastructure, we are also the clear No. 1.
Kallavuo: If you look at the big competitors, one is strong in wireless and one is strong in fixed. This new company will have a good balance. That's what I meant when I said that it's ready for converging markets. It's a very, very good fit.
Kleinfeld: It's a company that is solid, with a clean balance sheet. This is rare to find these days.
Why is the headquarters in Helsinki? Surely it's not the weather.
Kallasvuo: That you have right. It's simple. We are trying to operate in the way that makes the best possible sense in terms of being beneficial to the new company. We felt this combination of Helsinki on the one hand and a strong presence in Munich and Germany on the other would make sense. There's nothing more to it really. It's a very pragmatic thing.
Kleinfeld: Three of the businesses are headquartered in Germany. The whole idea was to put it together so it is strong, highly competitive, and fast.
Is the Helsinki headquarters a tacit acknowledgement that Nokia is better at being fast, maybe more so than Siemens?
Kleinfeld: The whole logic was to bring the best team together.
Will the new company carry any restructuring charges that occur?
Kleinfeld: The restructuring that needs to take place based on synergies in the new organization will be carried out by the new organization. The restructuring that we have already announced in Siemens Communications, which is still in the execution phase, will be carried out by the current organization.
How are you doing at meeting the profit targets that you set last year?
Kleinfeld: I think it's tracking very nicely. Six of the businesses are already there and we have three that are moving up to that—transportation systems, building technologies and industrial solutions. Then we have Siemens Business Service as well as communications where we clearly said we need strategic reorientation. This is clearly one step in the strategic reorientation, as was the sale of the mobile phone [business].
It seems as if you're getting close to your goals.
Kleinfeld: Yes, I was always surprised that people doubted that. The goals were established in the year 2000. It's not like I invented them. I fully believe they are the right goals. We want to have businesses that perform at the top level of the industry and we are going to go forward with that.
This deal is also a new step for Nokia, which is not known for mergers and acquisitions.
Kallasvuo: This is not an acquisition, it's a partnership. But nevertheless, that's correct, we are not known for that. This is a big thing for us, we are putting a major part of the company in a joint venture. That is why being able to find the right partner was so important.
How does this change Nokia?
Kallasvuo: It changes Nokia a bit. Governance-wise you manage it differently. But both Nokia and the new company will benefit if we can exploit Nokia's presence in the handset market in the right way. I hope there is a close and strong alliance between the new company and Nokia. But then again we continue to be present in handsets and networks, so in that way it does not fundamentally change what we are as a company.
Do you see any of Nokia's best practices seeping over to Siemens? Is that part of your motivation?
Kleinfeld: For us a 50-50 joint venture is not that unique. Bosch-Siemens Household Appliances has existed for decades and has been working very, very well. When you do those types of things you learn. It's mutual.
Kallasvuo: I, at least, hope to learn from Siemens.
Klein: I'm sure there are lots of things we can learn.
If I heard right at the press conference, no one was ruling out an initial public offering for the new company.
Kallasvuo: I don't think we took any stand. We are here announcing something new, a longtime joint venture.Kleinfeld: Had we felt we wanted to spin it off, we would have done it today. That's not something that we're considering.
There was a lot of talk about convergence. What does that mean exactly?
Kallasvuo: The wireline and wireless businesses have been pretty separate until now. Now the core part is converging and you have different types of access—it can be wireline and it can be wireless in different forms.
Kleinfeld: The network architecture is fundamentally changing. In the past when you looked at a network diagram you would have one for the wireless network, you would have a separate one for the fixed line. This is not necessary anymore. It's one network. If you look at the customer side, they see new opportunities, for instance for entertainment solutions. That changes the business model.
Do you expect your competitors to respond to this deal?
Kleinfeld: If they can!
What's your next priority?
Kleinfeld: We will continue to excite the market.