Yesterday (Tuesday, June 18th) Nokia's (NYSE:NOK) share price jumped above $4.00 after Huawei showed some interest in acquiring the company. While as a Nokia bull, I welcome the company's shares appreciating so much within a day, I don't think Huawei can actually buy Nokia.
I am not talking about it from a financial standpoint either. Nokia's current market value of $14 billion isn't that much when we consider that the company's cash reserves total a little over $13 billion (but just short of $14 billion). According to some calculations, Nokia's patent portfolio alone might be worth nearly $10 billion. Given the company's cheap valuation, most large companies could easily acquire it. However, one would have to look beyond financials to see the real picture.
First, Nokia has a mighty "big brother" whose name is Microsoft (NASDAQ:MSFT). If anyone were to buy Nokia, it would be none other than Microsoft. Since declaring war on Apple (NASDAQ:AAPL), Microsoft has been studying the company and its success very closely. The management at Microsoft realized that Apple's success stems from the fact that its hardware and software integrates perfectly because they come from the very same source. Apple designs its own software and hardware, which allows for a seamless integration. Microsoft has been hoping to replicate this model; however, building a smartphone is not easy for a company with nearly no patents or experience in this field. Then again, Microsoft could find its own Foxconn and have them worry about the hardware part. Fortunately, this didn't have to happen because Microsoft found itself a partner in Nokia.
Honestly, if I were running Microsoft and wanted to form a partnership with a company to build my phones, I would rather partner up with Nokia than a random Chinese manufacturer. Not only has Nokia a strong brand name and distribution channels (along with a huge library of patents), but the company also knows how to build a high quality phone. If Nokia were up for a sale, Microsoft would buy it before anyone else.
Second, associating itself with a low-cost Chinese manufacturer would hurt Nokia's brand name. Over the years, Nokia has developed a public perception for building the strongest, most endurable and highest quality phones in the world. Huawei is known for producing cheap and low quality phones. The company generates most of its revenues in countries where average income is really low.
Third, many Nokia shareholders wouldn't allow such a transaction. Most of Nokia's shareholders believe that the company is grossly undervalued and that it should be worth a lot more than what it is worth today. After all, if they didn't believe that the company was very cheap, they wouldn't have bought shares of it. In fact, many of Nokia's shareholders probably have been holding the shares since the shares were trading for $6-7 and they would lose money if Nokia were to be acquired today. Many shareholders would block a possible Huawei buy unless the company offered a huge premium to Nokia's current share price.
Fourth, Nokia Siemens Networks is a direct competitor of Huawei in many different projects. These two companies have completely different images as vendors. Nokia Siemens Networks is perceived as the premium vendor that knows what it is doing and ensures quality, whereas Huawei is perceived as the cheaper vendor that addresses the cost-reluctant market.
In the coming days, I expect Nokia to issue a statement saying that it is not up for sale. At this point, even Microsoft wouldn't be allowed to buy Nokia because the company isn't burning cash like it was last year (because it was able to cut a lot of costs through its transformation). At the moment, Nokia's balance sheet looks healthy and its survival is no longer in question. If Nokia went back to cash burning and the company's survivability were in question, Microsoft would probably bail out its little buddy because Nokia is crucial for the Windows Phone project, as it sells 83% of all Windows Phone devices sold globally.
Notice that I didn't even mention the legal aspects of whether Huawei can acquire Nokia. I am sure there are many Finnish and European laws that will stop Chinese companies from buying large European companies. I didn't talk much about the legal restrictions because this wouldn't even get to that point. I can't imagine Nokia selling itself to Huawei unless it was really desperate (and if it was that desperate, Microsoft would buy it).
Regardless of whether Huawei attempts to buy Nokia or not, the company continues to offer deep valuation for the long-term investors who are willing to be patient.
Disclosure: I am long MSFT, NOK, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.