Motorola, Nokia Siemens Deal Makes Sense for Both Parties

News Analysis: By selling its struggling network equipment business, Motorola improves its financial picture and gains the resources it needs to exploit its success with the Droid smartphone line.

The announcement by Nokia Siemens Networks that it will buy Motorola's wireless network infrastructure business for $1.2 billion will free the wireless product maker from its struggle to compete with larger competitors, while also giving it the cash it needs to carry out its plans to split the company into two independent and publicly traded companies.

The deal, announced on July 19 in a joint press release, is expected by both companies to close by the end of 2010. The deal has been in the works for some time, and is expected to result in no layoffs as Nokia Siemens will pick up 7,500 existing Motorola employees.

The move by Motorola to sells its wireless equipment business makes sense. Until now, the company has been fighting an uphill battle against Nokia Siemens and Huawei which are both much larger globally. The sale will significantly improve Nokia Siemens position in the United States and Japan, while allowing Motorola to put more money into its remaining two business areas, Motorola Mobility which would make smartphones including the hot-selling Droid X and a line of set-top boxes for televisions. The other unit, Motorola Solutions, makes public service and business radio systems, where it is a dominant player.

The deal also includes a cross licensing arrangement for patents from both companies. Motorola will keep its iDEN business, which is used by Sprint for push-to-talk communications. Until the sale, the networks business has been part of the Mobility business.

The sale of the network equipment business will accomplish a number of important things for Motorola. The first is that it will give the company funding to expand its manufacturing capacity for devices such as the Droid X, which has proven so popular that it has sold out at Verizon Wireless stores. Devices such as the Droid series have made the Mobility unit the most profitable at Motorola, according to a number of analysts in a report provided to the Chicago Tribune by Oppenheimer & Company. However, the inability to keep up with demand for its hot-selling smartphones is clearly cutting into that unit's performance.

The Motorola Solutions division is growing rapidly in response to increased needs for public service wireless communications. Motorola has been the dominant provider of radios for law enforcement in the United States for decades, and the expansion of law enforcement and public service communications into high-speed data promises even more growth. While Motorola needs to wait for the deployment of LTE to field some of its promised communications solutions, significant funding has entered this area of its business in response to stimulus funding by the Obama administration, as well as by Homeland Security funding for interoperable radios.

The primary growth in interoperable radios for law enforcement and national security is currently waiting for a final determination in auctions for the public safety bands that were recovered when commercial television was moved to an all-digital format last year. Much of the interoperable communications equipment will be similar to the digital equipment that Motorola is already making for its law enforcement and public service customers.

Nokia Siemens, meanwhile, will gain a foothold with two of the four major U.S. carriers, Sprint and Verizon Wireless. This could be a significant factor in coming months as Nokia Siemens is already a major supplier of network equipment and services to Deutsche Telekom, parent company of T-Mobile USA, and supplies much of the network infrastructure for European divisions of T-Mobile. A merger between Sprint and T-Mobile would find both companies sharing an equipment supplier, potentially easing the transition for sharing of facilities and a possible move of Sprint back to GSM.

Overall, Nokia Siemens stands to raise its profile in a number of markets and with dozens of wireless operators. More importantly, it can take advantage of economies of scale in its competition with its Chinese competitor, Huawei, which has been making inroads globally at the expense of Motorola and other suppliers. The result would be that Nokia Siemens will become a much stronger player in a number of markets, notably China and Japan.

The relationship between Motorola and Nokia Siemens may grow over time. For example, Motorola co-CEO Greg Brown told the Tribune in an interview that both companies are exploring a global relationship in public safety. While the talks are preliminary, they would put both companies into a dominant position in an area that's showing vast potential for growth.

If this seems like a match made in heaven, perhaps it is. Both companies get something they need, and they stand to grow in their respective areas of competence. Motorola, having found strong success with its Droid line of smartphones, now needs the capacity to build more of them. Nokia Siemens, for its part, needs access to markets that Motorola's equipment business provides. The fact that the two companies are talking about future deals should come as no surprise.