Siemens and Nokia said on Monday they would merge their telecom equipment and network activities to create the sector's third-biggest company and close the gap on market leader Ericsson.

"This joint venture is an important step to strengthen our position in the market sustainably," said Siemens CEO Klaus Kleinfeld. "This combination creates a leading industry player."

The tie-up between the Finnish and German giants, which follows hot on the heels of the recent merger between Alcatel and Lucent, is marking a further step in the consolidation of the highly fragmented telecom equipment industry in a move that analysts said could spark other deals.

"It's a very good deal for Siemens," said Dan Bieler, research director for technology analysts Ovum. "It takes a very important, credible step forward to target the internal problems of its communications division whilst retaining a stake in the great market for emerging opportunities in the convergence space."

Siemens has long been looking for a partner for its troubled telecom division, known as Com, after already selling its mobile handset operations to Taiwan consumer electronics group BenQ last year.

The telecom business is Siemens' largest division with annual sales of 13 billion euros ($16.4 billion). But it made a profit of just 27 million euros in the second quarter, equivalent to a return of sales of just 0.8 percent.

In tying the knot with Nokia, Siemens "has found a solution to its biggest restructuring problem," said Oppenheim Research analyst Frank Rothauge.

Shares soaring, unions in arms

Investors appeared to agree, with Siemens shares soaring 5.37 euros or 8.55 percent to 68.18 euros in mid-afternoon trade on the Frankfurt stock exchange on Monday.

BNP Exane Paribas upgraded its recommendation on Siemens shares to "outperform" from "neutral" in the wake of the deal. In Helsinki, Nokia shares were showing a gain of 4.86 percent at 16.41 euros.

"This is good news for everybody, although Siemens got the better end of deal since they got rid of a business that was losing money and acquired 50 percent of a business that is making money," one London-based analyst said.

But unions were up in arms.

"This is a serious mistake," said Siemens' general works council and the IG Metall labor union in a joint statement. Communications technology, one of Siemens' core competencies, represented "enormous innovation potential and excellent growth prospects," they said.

Terms of engagement

Under the terms of the deal, Nokia and Siemens are to set up a 50-50 joint venture to be called Nokia Siemens Networks, combining Nokia's networks business division and Siemens' carrier-related operations for fixed and mobile networks.

Nokia Siemens Networks will have annual sales of close to 16 billion euros ($20 billion) and a workforce of 60,000, making it number three in the telecommunications equipment sector behind Ericsson and Alcatel/Lucent.

Siemens is transferring activities equivalent to annual sales of around 9.2 billion euros ($7.3 billion) and a workforce of 37,000. Nokia's networks division represents annual sales of around 6.6 billion euros. No cash is to change hands.

Siemens' enterprise networks business -- which handles telephone systems for offices and companies -- was not included in the deal, but would be spun off into a separate legal entity in preparation for a separate partnership deal elsewhere.

Job cuts expected

The deal with Nokia was expected to close before January 1, 2007, pending the necessary regulatory approvals. Nokia and Siemens estimated the deal could begin to have a positive effect on earnings per share by the end of next year.

The merged unit is to be headed by Simon Beresford-Wylie, currently head of Nokia Networks, and have its operational headquarters in Helsinki. But three out of the group's future five divisions would be based in Munich. The tie-up of the two businesses would lead to annual cost-cutting of 1.5 billion euros by 2010.

The integration of the two businesses would also lead to job cuts, with 10-15 percent of the combined 60,000-strong workforce -- or 9,000 jobs in all -- to be axed over the next four years.

"We believe the partnership with Siemens is the most effective way to build the scale and broad product portfolio necessary to compete globally," said Nokia chief executive Olli-Pekka Kallasvuo.

Convergence is the buzz word

This idea of converging communications and media delivery is currently all the rage in the industry. Devices and platforms are becoming increasingly interoperable with phone calls being made over a wireless Internet network, or cell phones being used for surfing the Internet or watching TV on it. This is a growing market, and the race is on to provide the best infrastructure for such convergences.

"The communications industry is converging, and a strong and independent Nokia Siemens Networks will be ideally positioned to help customers lower costs and increase revenue while managing the challenges of converging technology," Kallasvuo said.