NSN:::Restructuring a Business and Using it as a Platform
I was reading this article the other day which states that two groups of rival PE-buyout firms were looking to acquire the Nokia-Siemens Networks JV business unit from Nokia and Siemens. My first reaction is this must be a huge relief to management teams at Nokia and Siemens. Both companies really do not want to be in the networks business as they are focused on their core business – hence the JV. Both companies do not want to restructure any more businesses and face the political wrath for layoffs. It would be much better to have some American bankers do it.
I know the reasons why the JV owners want to get rid of the JV. In the case of NOK, they have a lot of issues to resolve in their handset business and it is not getting better anytime soon. The networks business to Siemens is like a poor stepchild. The reason the two companies created the JV was to help improve business scale and eliminate duplicating R&D and market bids. In a world that has Huawei, ZTE, CSCO and then a whole host of solution focused mid-tier size companies like CIEN, JNPR and Avaya not to mention smaller players like Genband, APKT, FFIV and BSFT, one has to wonder how does a JV like NSN get back on track? I know they have focused on services and outsourcing deals and in that market ERIC is trying to compete with the same strategy as well.
Why would a PE firm want to buy all or a part of NSN? A part of it makes more sense and I do not know what part they would be looking at. There has been industry chatter that their optical group has been for sale since losing the Nortel bid to Ciena. If a company like Ciena was to acquire it, it would simply be for market share consolidation. A week or so ago there were rumors that Nokia was looking to buy CIEN, but that is just crazy to me. Why would a mobile device company want to buy CIEN? Maybe the person who started the rumor meant to say NSN was trying to buy CIEN, but this seems unlikely too considering that NSN just spent $975M for a portion of the old Motorola. NSN would have to spend billions to buy CIEN and that would require cash from the two JV owners. I think it is far fetched for someone to think that Nokia and Siemens want to make their JV bigger by spending billions to buy something as big as CIEN. I could be wrong, but I think I am living in the real world.
Back to the question of buying NSN if you were a PE firm. NSN is a €12 billion a year business. It is a loss making business, but the trend has been better. What would you pay for a business like this? Is it 1x sales or $16-17B? If you take the whole company private, you could possible dispose of a few pieces such as the optical business to CIEN. You could focus 100% of the company on the MPC business as well as services and outsourcing of networks. NSN closed the $975M deal to acquire Motorola’s networks business with 6,900 employees a few weeks ago. To me this is further evidence that NSN wants to be in the business of running networks as acquiring this asset is really a strategy to offer a technology transition bid to the MOT customers as part of an outsourcing deal.
With Nortel gone, NSN is the last land grab in the large cap equipment space. NSN has a deal with CSCO and a deal with JNPR. A year ago around the time that Starent was acquired by CSCO, there was industry chatter that CSCO was going to buy the Siemens stake and NSN was going to offer the Starent MPC. That never worked out, but I think it is important to note as it is an indication of the value of the NSN asset, channel and customers.
I think if you could buy the mobile networks, management and the services business of NSN, it could use that portion as a revenue foundation to bolt on other acquisitions. The One Equity team has taken this approach with Genband. No matter what part or all of NSN that is purchased, the question is what would you do with it? As a JV it seems to me that it is not a master of its own domain. As a private company, they could restructure in private and look to fix the product portfolio. I think the focus of a new start would be services and network outsourcing.
In my opinion, the trend within the top 100 global service providers is clear. This trend is not moving at light speed, but is a slow evolution. Service providers seem to be less interested in running networks, evaluating technology and pushing technical boundaries. This is clearly evident in ATT’s Domain Strategy. Standards such as LTE only provide for similar ubiquitous networks. Large service providers are going through a cultural shift wherein they seem less concerned about building networks and more concerned about customer acquisition and retention. The customer experience is more important than the technology in the network. Make it work, make it accessible to the customer and retain the customer is far more important than developing leading edge solutions. I would argue that the content aggregators or distributed computing providers such as Google, Amazon, Apple, Facebook will do more to drive technology trends than the RBOCs and PTTs of Cold War era.
As far as NSN goes, if I was the PE buyer my objective would be to build an company that is exceptional at integrating technology, building and running networks. I would not want to be part of the product development marathon. I would be far more interested in telling CxOs at the global 100 service providers that they can reduce costs by having us [NSN] run their network and they can focus on the customer. That is a powerful position if you can be successful as it is the same strategy that IBM used to comeback from the brink in the early 1990s.
* It is all about the network stupid, because it is all about compute. *
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