My first article on Nokia (NOK) was written in late January. Since then, I have been reading the contributions of other authors. I must say that the depth and scope of these articles is truly impressive. The saga of Nokia has been parsed more thoroughly than some of our President's speeches. Undoubtedly, Seeking Alpha is the place to visit when one wants reliable financial information. One article that I remember in particular, posited the theory that Nokia might be a takeover target. I recall the author mentioning Microsoft as a possible buyer. Let me take that theory and modify it. Instead of a buyout, why not a merger? Or better yet, a marriage. A marriage to Ericsson.
I can hear you snickering. I don't blame you. When I first thought of Nokia and Ericsson holding hands, I nearly dismissed it as too ridiculous to be considered. But then again, why not? Let's play matchmaker. For the sake of our metaphor, let's call Ericsson ADR (ERIC) the groom, which of course would make Nokia the blushing bride. Now we can consider what each would bring to the altar.
ERIC is no deadbeat with nearly $12 billion in cash. Strip out the debt and you're left with a tad over $2 a share in cash. Book value comes in at $6 a share. Levered at 20%, ERIC is no spendthrift. A dividend paid by ERIC yields 2%. The shares are trading hands at around $12 and change.
All is not rosy, however. Although ERIC works very hard and brought home a paycheck of nearly $867 million in the last twelve months, a nearly transparent profit margin of 2.5% means it took too much sweat to earn it. Also, an anemic 4% return on assets and equity leads one to believe that ERIC could do much to improve in the area of management. This fact becomes even more relevant when you factor in ERIC's industriousness as a worldwide builder of communication infrastructure, and provider of ancillary services and software. From Siberia to Ethiopia, and to 160 other countries in between, ERIC is the leader in microwave solutions.
ERIC doesn't stroll down the aisle without baggage. A lengthy telephone affair with an Asian temptress called Sony (SNE) ended last year. In addition, ERIC is in court with yet another Asian beauty by the name of Samsung (SSNLF.PK). The lawsuit is about alleged patent infringements. There's always something, isn't there?
At first glance, we can see that Nokia's numbers aren't as good as ERIC's. Nokia has in the neighborhood of $13 billion in cash and around $7 billion in debt which leaves you with about $1.80 a share in cash. As most of us know, Nokia recently eliminated its dividend. Many Nokia stockholders, including myself, applauded this move. Although Nokia turned a profit this last quarter, return on assets and equity was deplorable. Nokia has been taking numerous steps to remedy this situation and the picture should brighten as the year progresses. Nokia Siemens Networks (NSN), the business segment concerned with building and maintaining mobile networks, had a good quarter. The margins in this segment are plump and if they can be maintained in the future, Nokia should have the resources to capitalize on the promising start of another project. Namely, the Lumia.
Like ERIC, however, Nokia is toting baggage. It seems Herr Siemens (SI) is breaking it off with Nokia. After six years, Siemens says it's interested in other endeavors. Be that as it may, Nokia is not without options. An initial public offering of Nokia Siemens has been mentioned. Another scenario would have Nokia, with the aid of a partner, buying out the Siemens half of the venture. One possible partner being hinted at is Alcatel-Lucent SA (ALU). The plot thickens, or congeals as the case may be.
Now, how about a snapshot of ERIC and Nokia together?
The synergies are obvious.
ERIC, who sometimes goes by the name Ericsson Phone Company, doesn't have a phone.
Nokia has a phone, and it's a dandy.
Nokia is losing its partner in a phone equipment venture that shows real promise.
Infrastructure, system and service rollout is ERIC's forte.
A combined Ericsson/Nokia would be a global powerhouse with the finances and expertise to take on all competitors.
To be honest, I realize that the wedding would be a complicated and expensive undertaking. Also, it's anyone's guess how the reception might turn out. And could the union dissolve in divorce? Of course. One moment, I think the whole scenario too farfetched for contemplation, and then I recall all the corporate couplings in the past that made much less sense than this one.
This article is an attempt to look at Nokia from a different perspective. It's an effort to break free from the forest of numbers and ratios and gain a wider dimension of the situation. To a certain degree, I believe I've been successful.
Peter Lynch recommends that an investor write down why they purchased a stock. That, in essence, is what I've done here. By looking at Nokia through the eyes of Ericsson, I've reminded myself of the many reasons I bought the stock in the first place. I hope this article does the same for you.
Disclosure: I am long NOK.