On June 19, 2013, The Wall Street Journal reported that "people familiar with the matter" claimed Microsoft Corporation (MSFT) had held "advanced talks" to buy out the Nokia Corporation (NOK) handset business. This deal apparently fell apart over price, and it is assumed that Microsoft Corporation refused to pay a sharp premium above Nokia Corporation's current $15 billion market capitalization. Speculators who own Nokia Corporation stock, of course, favor and uphold alleged prospects for a Microsoft Corporation takeover of the beleaguered firm. Rational investors, however, should entertain the idea that Microsoft Corporation now operates with little-to-no economic incentive to acquire Nokia Corporation. If anything, the show of buying interest was a bluff, or a calculated move to defend this space against any Android threat. At worst, Microsoft Corporation could effectively withdraw financial backing away from Nokia Corporation, and pick up the pieces for cheap as top creditor at a later date.
Microsoft Corporation - Nokia Corporation Partnership
On February 11, 2011, Microsoft Corporation and Nokia Corporation announced broad plans to partner up and build out an advanced technological and global ecosystem. Terms of the agreement indicate that Microsoft Corporation would put up the software and marketing dollars, in exchange for an effective monopoly of access to Nokia Corporation hardware. The ultimate build out of this Windows platform is designed to compete against both the Google Android and Apple iOS ecosystems that deliver computing, entertainment, and telecommunications infrastructure. The smartphone is the obvious focal point of this technology network. For Apple Inc.'s last 2012 fiscal year, ended September 29, 2012, the company sold 125 million iPhone units. The iPhone alone accounted for $80 billion, or more than half of Apple's $156 billion in 2012 total net sales.
Microsoft Corporation and Nokia Corporation, of course, are looking to get in on this action. Ironically, any idea of a Microsoft Corporation/Nokia Corporation partnership would have been unfathomable into the early 2000s. That decade, Microsoft Corporation was coming off defending itself against a brutal anti-trust litigation campaign versus the U.S. Department of Justice and the European Community. At the same time, Nokia Corporation was the world's leading handset maker, in terms of units sold. Last year, in 2012, research firm Strategy Analytics reported that Samsung shipped 93.5 million handsets compared to Nokia Corporation's 82.7 million handsets during the first calendar quarter of the year. Samsung's performance put an end to Nokia Corporation's fourteen-year run atop the unit sales list.
Over the past decade, Microsoft Corporation stock has done little, beyond paying out dividends to shareholders. Microsoft Corporation executives are aggressively angling for real growth, rather than the literally utilitarian strategy of software licensing to mature original equipment makers. Microsoft Corporation, with its $300 billion market capitalization, will need to hit one home run, instead of banging out base hits, or even striking out at the plate with Nokia Corporation.
The Smartphone Market
On June 28, 2013, research firm comScore released its May 2013 report detailing smart phone subscriber market share. This data averages information for the three-month period spanning between February 2013 and May 2013. A brief overview of this latest comScore report will highlight the duopoly controlling the smart phone space. Taken together, the Google Inc (GOOG) Android and Apple Inc. (AAPL) iOS operating systems power respective 52% and 39% shares of the U.S. smart phone subscriber market. The Google Android and Apple iOS platforms actually continue to consolidate strength - as evidenced by the combined 1% increase in share for the duopoly above the prior quarter. On the handset side of the ledger, Apple and Samsung also sit atop this list - with 39% and 23% market shares respectively, as original equipment makers.
At the bottom of the heap, BlackBerry, Microsoft Corporation/Windows, and the now effectively defunct Nokia Corporation/Symbian operating systems are battling over the paltry remaining 8% market share of the smartphone market. At best, Nokia Corporation will emerge as a viable third-wheel option alongside the dominant Google Android/ Apple iOS duopoly. Most likely, all smartphone launch events out of both BlackBerry and Nokia Corporation will fail to perform. The smartphone is now a commodity - where brand recognition is now increasingly important. According to Robert Cyran of The Globe and Mail, the smartphone patent bubble has already burst. Cyran cites Google's May 2012 $12.5 billion acquisition of Motorola as a marker of the height of the smartphone patent bubble. The smart phone market is maturing to the point where the days of hyper sales growth and robust profit margins are long gone. All phones place calls, access the Internet, play music, take pictures, and shoot videos. Going forward, designing any so-called revolutionary "Killer App" within this smart phone space is a near impossibility.
The Nokia Corporation Lumia 1020 will be the latest installment following a long line of disappointing premium Windows smart phones. A recent write-up by technology newsletter CNET praises the Lumia 1020 phone - largely on the strength of its 41-megapixel camera. Although the online magazine delivers a glowing report of the Lumia 1020 "turning up the heat," we have already sat through this movie before. Largely over the past two years, every phone released by both Nokia Corporation and BlackBerry has been hailed as the transformative product to resurrect these companies and deliver them form the depths of inevitable bankruptcy. As always, the quarterly report following the launch will paint a bleak picture of disappointing sales. Speculators will then immediately dump stock - upon news of another flop.
At the moment, Nokia Corporation deserves no premium above its $15 billion in market capitalization. If anything, thecompany still remains overvalued. At worst, Microsoft Corporation can do nothing, and pick Nokia Corporation back up on the cheap amid bankruptcy. Microsoft Corporation's feigned interest in Nokia Corporation can and will effectively blockade the company from entertaining other suitors and exploring deals to further integrate the now rival Android operating system.
The Bottom Line
On April 18, 2013, Nokia Corporation released a financial report for its first fiscal quarterly period ended March 31, 2013. For Q1 2013, Nokia Corporation closed out its books with $38 billion in assets, over top of $20 billion in liabilities on the balance sheet, for an intangible net worth of $18 billion. Wall Street traders have effectively applied a $15 billion market capitalization price tag to Nokia Corporation. Wall Street traders are therefore announcing that Nokia Corporation is worth more if it were to be immediately broken up and sold off for scrap, instead of continuing to operate as a going concern. Certainly, Microsoft Corporation brass also arrived at similar conclusions, prior to sitting down at the negotiation table with Nokia Corporation.
The Nokia Corporation balance sheet does include $6.4 billion in goodwill, $645 million in intangible assets, and $1.8 billion in property, plant, and equipment. After subtracting away the $7 billion in goodwill and net intangible assets, Nokia Corporation shareholders are left with $31 billion in tangible assets, or $11 billion in tangible net worth. $11 billion in tangible net worth does break down further to roughly $3 per share in tangible book value, when divided over Nokia Corporation's 3.7 billion shares of common stock outstanding. For the last quarter, Nokia Corporation posted $445 million in losses. This performance is even more disappointing when juxtaposed against the fact that Microsoft Corporation is paying Nokia Corporation $250 million per quarter in "platform support payments." Yes, Microsoft Corporation is practically keeping Nokia Corporation afloat, while the value of the handset business is still trending towards zero.
According to a recent regulatory filing, Nokia Corporation still owes a net $650 million to Microsoft Corporation. Microsoft Corporation now operates as the obviously dominant party in this relationship. Buying out Nokia Corporation for a premium makes no economic sense at these levels. To call Microsoft Corporation's bluff, Nokia Corporation executives should consider striking deals to also supply hardware for the Android operating system. The Redmond savior will never materialize - and Nokia Corporation shareholders should sell out now - before they are all left stranded at the altar and clutching a toxic bag of depreciating assets as a parting gift.