As of April 3rd, 2013, Nokia (NOK) and Siemens (SI) have the freedom to determine what to do with their half of the company. Each company owns 50% of the joint venture and there are different scenarios that might happen in the following weeks. First, Nokia and Siemens both might keep their share of the joint venture and the business could just go as the usual. Second, one of the companies could keep their half of the joint venture whereas the other company could sell its shares to a third party. Third, one of the companies could buy the shares of the other company and own the whole thing. Fourth, both companies could sell their shares to a third party. Fifth, the two companies could spin off the joint venture as a separate company in an IPO. The most likely possibility is that Nokia keeps its part of the Nokia Siemens Networks and Siemens sells its shares to either Nokia or a third party.
Nokia Siemens Networks employs nearly 60,000 employees, which makes up more than half of Nokia's entire workforce. In fact, until last year, the number of employees in NSN was around 80,000, which made up two thirds of the entire Nokia workforce. Many analysts and investors saw NSN as a cumbersome company which Nokia should have gotten rid of in order to focus on its core business, which is building, marketing and distributing mobile handsets. About 10 months ago, I wrote an article titled "I would not underestimate Nokia Siemens Networks" where I talked about the importance of the joint venture for Nokia and how the company will utilize this business unit for its turnaround. By the end of 2012, NSN proved many analysts wrong by becoming the most profitable part of Nokia. In fact, as bullish as I was regarding NSN, the company's double-digit profit margins surprised me as well, because I wasn't expecting the company to return to profitability that quickly. After laying off nearly 20,000 employees and cutting costs right and left, the company started to do really well.
Break-up in the horizon?
As profitable as it is, Siemens still doesn't want a part of the joint venture anymore. Over the years, Siemens has grown so much that it branched out to many different business sectors and started to lose its focus. I've always called Siemens "the GE of Germany." Now Siemens wants to reduce the diversity of its businesses and find its focus so that it can grow in those sectors. After all, Siemens let Nokia run NSN for the most part even though it owned 50% of the joint venture. Even the company's headquarters are in Espoo, Finland, where Nokia's headquarters is. The employees of NSN are mostly under Nokia's payroll.
Unlike Siemens, Nokia is fully committed to NSN. In fact, the company is proud of its achievements under NSN. Over the years, Nokia spent billions and billions of dollars in R&D and Nokia Siemens Networks currently owns a wide range of patents that are very crucial to the telecommunication industry. NSN completes Nokia's business model whose vision is to "connect people" since 1970s. As we have seen last year, having multiple business units is very important for a company as large as Nokia because if one of the business units fails to turn a profit in a given year, the other business units can make enough profit to pay the bills. Just as investors are better off when they diversify their portfolio, the same goes for companies too.
In Nokia's recently released 20-F, the company makes it clear that it has all the intentions of keeping NSN as a part of its business in the future. There are several parts where Nokia mentions NSN as a part of its long-term plans, even though the company offers no guarantees about the changeability of these plans. Currently NSN is facing some issues such as stiff competition, particularly from Chinese companies who can offer similar services at much lower prices due to low employee costs and government subsidies. However, Nokia's advantage stems from its reputation. Most companies and organizations know that Nokia is the company to go to if one wants to get products and services that are good on the quality and dependability side rather than on the price tag alone.
Exciting Opportunities Ahead
Lately, NSN has been doing some exciting things. The company received one large contract from Brazil to build and maintain a LTE network for the World Cup that will be held in that country next year. The head of mobile networks at TIM Brasil, Marco di Costanzo, made an announcement, which is in line with the paragraph above:
"Our long-term partnership with Nokia Siemens Networks has been excellent, and the 2G and 3G equipment installed by the company is performing so well that it was a natural decision to deploy an LTE network with the same vendor. We are confident that Nokia Siemens Networks will build a robust LTE network for us to launch ultra-fast 4G mobile broadband services to satisfy our customers."
Basically, Nokia Siemens Networks has a lot of happy customers in more than 150 countries that keep awarding the company with more contracts because of the high quality work it conducts. There aren't many companies that can compete with NSN in terms of customer satisfaction.
Advanced Info Service was another company that awarded NSN a contract in the last couple of days. AIS is the largest mobile phone operator in Thailand and NSN is now contracted to build LTE networks for the company. The company's management also acknowledged NSN's greatness when they explained why they awarded the contract to this particular company. Saran Phaloprakarn, vice president of Network Strategic Planning said:
"Implementing a 3G network is very crucial for us. Nokia Siemens Networks has proven its expertise both technically and commercially throughout its partnership with AIS over the last 20 years. We needed a partner who understands our business, and could deploy and manage our network, enabling us to provide the best service to our growing customer base. Nokia Siemens Networks was the clear choice for us to roll out 3G services to the market."
In the Philippines the company is doubling the number of research and development personnel it has in order to address the increasing demand in Asia. This is important to note because NSN has been reducing its headcount for the last couple of years and the company wouldn't be hiring more people unless it is highly convinced that it will generate growth in the near future.
The Future of NSN
At the moment, service providers from many countries are upgrading their 3G and 4G networks in order to help customers fully utilize the new smartphones that are hitting the market. There will be plenty of business for Nokia Siemens Networks for the foreseeable future.
Nokia is committed to keep its shares of NSN and Siemens might offload some or all of its shares in the near future. In the event that Siemens sells its shares, Nokia might find a partner (maybe Microsoft?) and buy those shares off. We might even see a surprise player such as Ericsson being interested in Siemens's part of the deal. After all Ericsson is NSN's biggest competitor. If would be nice to see the two companies combine forces to deal with Asian vendors who can't compete in quality but try to compete by setting lower prices.
Nokia Siemens Networks expects to generate $20-22 billion in revenues in 2013. If Nokia and Siemens decide to spin the joint venture off as a separate company, they would be looking at a price tag around $18-25 billion given a 10% profit margin and 4-5% annual growth rate. Including the patent portfolios, the price tag can even go higher. I really hope and think that Nokia will keep its part of NSN though.
I am long Nokia and I believe that NSN is a very important part of the company. NSN will continue to play a major role in Nokia's turnaround just as I predicted 10 months ago.
Additional disclosure: I write covered calls on my Nokia shares every month to reduce my breakeven price.