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Nokia Takeover Seen as Collapsing Shares Signal Bottom: Real M&A

June 15, 2012

Nokia Takeover Seen as Collapsing Shares Signal Bottom

People walk past the Nokia flagship store in Helsinki. Photographer: Markku Ulander/AFP/Getty Images

Nokia Oyj (NOK1V)’s steepest stock drop in more than a decade is turning the mobile-device maker into a potential takeover target for buyers willing to bet that it still has a future in smartphones.

Nokia plunged 18 percent yesterday after forecasting a wider second-quarter operating loss from handsets and saying it will cut as many as 10,000 jobs as it cedes market share to Apple Inc. (AAPL:US)’s iPhone and Samsung Electronics Co. devices. After wiping out about $100 billion in market value, Espoo, Finland- based Nokia trades at a 38 percent discount to its net assets, the least expensive on record, according to data compiled by Bloomberg dating back to 1995.

Once Europe’s most valuable company, Nokia is losing money as it tries to rebuild the smartphone business around Microsoft Corp. (MSFT:US)’s Windows Phone software and after failing to sell an unprofitable equipment venture with Siemens AG. (SIE) With the lowest price-sales multiple among communications-equipment makers, cash and short-term investments exceeding its $8.6 billion market value and more than 10,000 patent families, Nokia could attract Microsoft, said Falcon Point Capital LLC. It may even be cheap enough to lure buyout firms, Avian Securities LLC said.

“The key question is, can they do something to turn this into a growth business again?” Michael Mahoney, senior managing director at Falcon Point in San Francisco, said in a telephone interview. “If they can just make it grow, even a little bit, it’s very cheap.”

Doug Dawson, a spokesman at Nokia, declined to comment on speculation about a possible sale.

Losing Lead

“This is a great company and we’re going to build on our strengths in brand, scale” and intellectual property, Dawson said. “We think we have the assets for growth.”

Moody’s Investors Service today became the last of the three major rating companies to cut Nokia’s debt to junk.

Nokia started out as a wood-pulp and paper company in 1865 before expanding into rubber, electronics and eventually telecommunications. The company’s market capitalization, which was more than 300 billion euros in 2000, has tumbled more than 90 percent since the iPhone was introduced five years ago, valuing it at 6.8 billion euros ($8.6 billion) as of yesterday.

The world’s largest handset maker for 14 years, Nokia’s market share has been gouged in recent years by Apple and device makers such as Samsung (005930) that use Google Inc. (GOOG:US)’s Android system, the fastest-growing major smartphone platform. Samsung earlier this year overtook Nokia for the top spot in mobile phones overall, according to Stamford, Connecticut-based Gartner Inc.

Nokia, which hired Microsoft’s Stephen Elop as chief executive officer in 2010 to halt the slide, last year adopted Microsoft’s Windows Phone, ditching its own smartphone software in a bid to recapture market share.

Lowered Forecast

Nokia’s share of smartphone shipments fell to 7.8 percent in the first quarter, according to International Data Corp.

“Any company that goes through these kinds of massive tech discontinuities and competitive changes, it’s death by a thousand cuts,” Adnaan Ahmad, an analyst at Berenberg Bank in London, said in a phone interview.

Yesterday, Nokia cut its earnings forecast for the second time this year and added 10,000 job cuts to more than 10,000 already announced in the handset division.

“This is harder than we thought and we’re having to make deeper changes,” Elop said on a conference call yesterday.

Nokia’s decline yesterday reduced the stock price to 1.83 euros, which is 0.62 times book value, an all-time low for the company since at least 1995, according to data compiled by Bloomberg. Today, the stock rose 5.6 percent to 1.93 euros.

Cash Hoard

The company was valued at an 81 percent discount to its revenue, also a record low and a cheaper multiple than every other communications-equipment maker in the world with a market capitalization of at least $5 billion, the data show.

Nokia had $12.4 billion in cash and short-term investments as of March 31, topping its market value of $8.6 billion yesterday, the data show. After accounting for debt, Nokia’s net cash position of $5.9 billion is still the equivalent of 68 percent of its market capitalization.

“Close to half of the market cap is cash -- that’s cheap no matter what’s going on,” Falcon Point’s Mahoney said. For private-equity firms, “it’s cheap enough. When you are at this type of level, you don’t even need to cut costs that much to get value out of the transaction.”

Matt Thornton, a Boston-based analyst at Avian Securities, said a private-equity firm could be interested in buying Nokia’s main handset business for its cash, while the Nokia Siemens Networks venture could be sold or spun off into a separate public company.

Samsung Speculation

On June 8, Nokia shares climbed the most in five months as investors speculated that Samsung, the world’s largest mobile- phone maker, was preparing a takeover offer. Samsung, based in Suwon, South Korea, released a statement earlier this week saying the market speculation was groundless.

“Samsung, I think, is almost impossible,” said Janardan Menon, an analyst at Liberum Capital Ltd. in London. “They’ve got a great business themselves, why would they want to go and spoil their margins with this? It comes with too much baggage in terms of cost structure and legacy operating systems.”

Microsoft is the most likely buyer of Nokia, its main partner in smartphones, as it aims to turn Windows Phone into a viable contender to Apple iOS operating system and Android, Charlie Wolf, a New York-based analyst at Needham & Co., said in an interview.

“If Nokia doesn’t come out of its funk within a year, Nokia is going to be finished,” Wolf said. “And without Nokia, Windows Phone could be finished. It’s difficult to see Microsoft winning in the smartphone space -- it needs to buy Nokia.”

Patent Power

Besides gaining Nokia’s hardware engineering expertise, manufacturing operations and distribution system, Microsoft could benefit from the Finnish company’s portfolio of patents. Wolf estimates Nokia’s patents are more valuable than the ones Google acquired with its $12.8 billion purchase of Motorola Mobility Holdings Inc., which closed last month. Nokia’s patents may be worth $7.5 billion, according to MKM Partners.

Kristin Widing, a spokeswoman for Redmond, Washington-based Microsoft, declined to comment on whether the company would consider purchasing Nokia.

Other buyers could include Chinese telecommunications companies such as Huawei Technologies Co., China’s largest maker of phone equipment, or ZTE Corp. (763), China’s second-biggest manufacturer in the industry, Falcon Point’s Mahoney said.

“Nokia is a fantastic brand,” Mahoney said. “I just think American subscribers who owned Nokia phones in the past probably liked them. That might help the Chinese side to approach the world market -- and get more money for their phones in China.”

Not Yet

Jannie Long, a U.S.-based spokeswoman for Huawei, which is located in Shenzhen, declined to comment.

“As far as I know, ZTE doesn’t have any plan for Nokia,” David Dai, a spokesman for Shenzhen-based ZTE, said.

Michael Genovese, managing director at MKM Partners, said an acquirer is unlikely to step forward now while the company is still losing market share.

“I’ve been in the stores, and no one is buying Nokia’s Windows Phones,” Genovese said. “I don’t think anyone will be buying them any time soon. Microsoft may eventually end up buying Nokia, but that’s at least a year away.”

As it attempts to restructure and to stabilize its business, the company could burn through much of its cash in two years, Genovese said. The company lost 1.16 billion euros in 2011, and is projected to lose an additional 1.9 billion euros this year as sales decline 18 percent, according to analysts’ estimates compiled by Bloomberg.

‘Lottery Ticket’

“Who would buy them at this point?” Lars Soederfjell, a Stockholm-based analyst with Bank of Aaland, said in a telephone interview. “You need to stabilize the business. There’s too much uncertainty. It’s more like buying a lottery ticket than anything else.”

Still, industry analysts at Gartner and Framingham, Massachusetts-based IDC say they expect the Windows Phone platform will make inroads as Microsoft develops it further.

Carolina Milanesi, an analyst at Gartner, said the firm forecasts Windows Phone will be the second-biggest smartphone ecosystem after Android in 2015. IDC expects Windows Phone to pass Apple’s iOS in 2016.

For a potential acquirer looking to enter the phone market, Nokia’s depressed valuation may offer a compelling entry point, said Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion and owns Microsoft shares.

“I’m sure it’s much cheaper at these prices to buy Nokia rather than build,” Holland said in a phone interview. Nokia’s “valuations are just so compelling. The question is, does anyone have the confidence to take that step?”

To contact the reporters on this story: Olga Kharif in Portland, Oregon, at okharif@bloomberg.net; Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net.

To contact the editors responsible for this story: Katherine Snyder at ksnyder@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net.


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