Nokia and Siemens today said they would combine their respective network divisions, creating a huge telecom infrastructure division rivaled only by Ericsson and the soon-to-be-combined Alcatel and Lucent Technologies.

The joint venture will be owned 50-50 by both companies, but will be based in Finland and run by Nokia Networks current chief, Simon Beresford-Wylie, but Siemens will install its own executive, Peter Schoenhoffer, as chief financial officer and the company will have substantial offices in Siemens' hometown of Munich, Germany. The company, however, will likely cut staff across the board as they estimate 10% to 15% of the combined 60,000 workforce will be cut, resulting in cost savings of Euro 1.5 billion (U.S. $1.9 billion) by 2010.

The companies said they expect to bring the joint venture through regulatory and shareholder approval by the end of the year.

The joint venture is the latest in a series of M&A activity rocking the industry as it fast consolidates. Ericsson bought Marconi’s network operations last year, and Alcatel is buying Lucent Technologies for a cool $13.4 billion. While Alcatel and Lucent claim they have little overlap in their networks portfolios though, Nokia and Siemens share significant crossover in their product lines, particularly in wireless. Both are strong GSM vendors in Europe and in the U.S. In fact, Nokia and Siemens are both major networks suppliers for Cingular’s GSM network, and Siemens won part of the bid for Cingular’s UMTS/high-speed downlink packet access network (HSDPA) rollout, giving the combined company a strong 3G presence in the U.S. Both companies also have mobile switching portfolios and are pursuing similar IP multimedia subsystem (IMS) strategies.

Even the structure of the deal isn’t unprecedented. Ericsson and Sony tied up to launch their successful mobile phone venture after Sony canceled its international handset production and Ericsson saw its number two position behind Nokia continually eroding. Nokia itself announced a joint venture this year with Sanyo, consolidating their CDMA handset operations. Also, with their networks divisions combined, the two vendors will have barely any competitive overlap in their other business units. While Siemens is a massive conglomerate that makes everything from MRI machines to IT networking gear, Nokia has always been a company primarily focused on wireless. As Siemens unloaded its under-performing handset business on Taiwan’s BenQ last year, there will be no conflict of interest on the mobile phone side, Nokia’s biggest and most profitable business.

The timing of the announcement was a surprise, according to Reuben Chaudhury, Mercer Management Consulting director, although Klaus Kleinfeld, Siemens CEO, had indicated a desire to exit the communications business, once a high-flying operation for Siemens but now a drain on the German giant’s profitability.

New Nokia CEO Olli-Pekka Kallasvuo wasted no time in redirecting the Finnish vendor’s lagging networks division since taking over just 19 days ago for Jorma Ollila, though due to the complexity of such a deal, negotiations were likely going on between the companies long under Ollila’s tenure. Meanwhile, Siemens has been experiencing ongoing financial troubles as it has tried to put order to its manifold technology groups.

Industry observers have been predicting the current rapid consolidation wave for years, keeping in line with the carriers’ own merger trends. In addition, the traditional vendors of the west have been feeling pressure from Asian vendors, first from Korea and now from China, creating a situation where there are a dozen vendors servicing the same markets, though the carriers in those markets have dwindled. Many operators have exited whole telecom sectors entirely in recent years, as was the case with Siemens in handsets, Nortel with DSL and Ericsson with CDMA. Some vendors, such as Nortel, said they would not even bothering pursuing a product line or market unless there is a reasonable chance they can become a top-three player in the field.

This deal puts pressure on companies such as Ciena, Nortel and Tellabs, as well as smaller vendors, to consolidate, analysts agree.

“We expect further industry M&A given telco customer consolidation, peaking margins, and vendors seeking to complete product portfolios for IPTV, IMS and 4G,” said UBS Global Equity Research, in a research note on the Siemens-Nokia merger.

Short-term, such mergers will create challenges, said Marcus L. Kupferschmidt, of Lehman Brothers Equity Research.

“Our continued view on vendor M&A activity is that it is has strategic long-term benefits to consolidators, but vendors combining operations can lose some short-term market share as mergers close,” he said in a research note. “As bigger telecom equipment vendors get bigger, they have the potential to pass on some of the cost savings to customers, which can increase pricing pressure intermediate-term before a more rational market emerges.”

Specifically, the Nokia-Siemens merger comes as Siemens Communications is already in the midst of a “difficult restructuring” that had targeted 5500 jobs for reduction, said Chaudhury. “This number will now increase, particularly as the two companies address overlaps in R&D,” he said. “Nokia needs to address Siemens' relatively outdated supply chain, which still does a large portion of manufacturing and logistics in-house.The governance model of the new firm--joint ownership between Nokia and Siemens--will likely slow down decision-making.”