The dramatic saga between Nokia (NOK) and Microsoft (MSFT) is finally coming to a close, with Microsoft announcing late Monday night that they will be purchasing Nokia's most well known business, and license their patents and mapping services, for $7.2 Billion. Microsoft will pay $5.0 billion for Nokia's mobile handset unit, and $2.2 billion to license Nokia's patents and mapping services.
The news comes after a week fueled with speculation of who would be replacing Microsoft's departing CEO, Steve Ballmer. While Nokia has put up a respectable fight in the smart phone war, and has managed to claw back at its competitors and remain more relevant than BlackBerry (BBRY), it seems that a major motive behind Microsoft's acquisition of Nokia is due to the man in charge, Stephen Elop. Elop is now, without a doubt, the next CEO of Microsoft. Period. Expect those 5 to 1 odds to increase soon.
With Microsoft scrambling to find a new CEO, the synergies between Nokia's handset unit and Microsoft's Windows 8 ecosystem, and the previous experience and ripe age of Elop, it seems that Microsoft is willing to pay a pretty penny for only a piece of Nokia. Microsoft is paying roughly $1.35 per share for a handset division that has been struggling to post a profit for years, and nearly $1.95 per share for the whole deal. Keep in mind that before Tuesday's open, Nokia's market cap was around $14.45 billion, and their share price was $3.89. Nokia's mobile handset division is hardly reflected in these numbers, and it is interesting to see how the market will assess Microsoft's valuation of a business that many investors and analysts wrote off as dead.
Microsoft is now more than ever focused on securing their future, and clearly they see massive potential with Nokia's handset division, their hardware capabilities, and their management team. Many Nokia executives besides Elop will be joining Microsoft, including Jo Harlow (VP of smart devices), Juha Putkiranta (VP of Operations), Timo Toikkanen (VP of mobile phones), and Chris Weber (VP of Sales and Marketing). Not to mention 32,000 Nokia employees.
The future growth of Microsoft's Windows ecosystem will be spearheaded by Stephen Elop and supplemented by the robust lineup of future hardware devices coming out of this partnership.
Nokia's future looks brighter than ever. Not only are they receiving a massive cash infusion from Microsoft, but they are also divesting from their least profitable business. Financially, the company will be in strong health, and will have a massive cushion to focus its resources on its most profitable business segment, Nokia Solution Networks, and continue to develop and improve Here maps. Nokia will no longer be burning large amounts of cash each quarter, and can designate more resources towards generating revenue from their massive patent portfolio.
I see Nokia being lumped in with other telecom companies such as Ericsson (ERIC) and Alcatel Lucent (ALU) in the not so distant future, but the company will still generate diverse revenue streams and should have a more stable financial outlook.
While Nokia has lost some great management executives, they have also managed to shed a lot of liabilities and risks, including the intense competition that has been eating away at Nokia's market share. The upcoming release of the low cost iPhone 5C could possibly prove a tremendous blow to OEMs of the low-end smart phone market (if the price is right), which Nokia has dominated with the 520/620 Lumia models. But now, if the deal between Nokia and Microsoft goes through, Nokia investors can dump these thoughts because the company will no longer be competing with the likes of Apple (AAPL), Samsung (GM:SSNLF), and BlackBerry.
As Nokia begins to act more as a telecom company, the next question on the table will be: when will the suspended dividend return? With more than $3 billion in cash, more on the way from Microsoft, and a lean, profitable business, Nokia is on its way to becoming a miniature cash cow. The dispersion of that money is inevitable.
Microsoft has continued to grow as a company under Ballmer's reign, but they failed to truly innovate for over a decade. One just has to look at Microsoft's 10-year stock chart. The stock price has stagnated between $25 and $35 for more than a decade, and a clear sense of urgency seemed to be missing from Microsoft's top executives until just last month when they announced a major business restructuring.
Stephen Elop is an experienced Microsoft executive who was head of Microsoft's Office division, which experienced robust growth under his direction. Stephen Elop knows how to jumpstart a company, just as he has done with Nokia. Elop has proved with Nokia that he is fully capable of turning around a dying company, especially in a cutthroat environment. Microsoft is striving to fulfill its vision of becoming a devices and services company, and they will leverage all of Nokia's transferred executives to make this goal a reality.
Elop, famous for his burning memo at Nokia, is known for his unique management style and burning down barriers in the work environment, which will allow ideas and concepts to easily flow throughout the company. Elop managed to light a fire under Nokia's bottom, and there's no reason why he wouldn't do that with Microsoft. From creating massive hype around the Lumia 1020, to leading the buyout of Siemens' stake in NSN, Elop is a versatile manager who can create an environment of innovation and help Microsoft's stock get back on its feet. With the hardware innovation that is embedded in Nokia, Microsoft will have no problem becoming a device company that promotes and sells sleek, capable smart phones.
Windows Phone Growth
The massive growth potential lies in Windows Phone, and Microsoft understands that. So does Kantar. The latest figures released over Labor Day weekend show that Windows Phone has become a relevant contender in the smartphone market, thanks to Nokia's Lumia range, especially the 520. Windows Phone hit a record market share of 8.2% across the UK, Germany, France, Italy, and Spain. The market share stood at 11.6% in Mexico.
The strong growth can be attributed to Nokia's strategy of creating a "stepping stone" for feature phone users to upgrade to low-end smart phone devices. 42% of Windows Phone sales over the past year came from feature phone users, which means the potential long-term growth is massive. These numbers are much higher than Android and Apple's iPhone. This trend will only continue, as Windows Phone continues to grow in emerging markets at a much faster rate than its competitors.
Timing is of the essence, and it is essential to look at the factors that drove Microsoft to buy Nokia's phone division at this point in time. Clearly Microsoft already saw Nokia as a valuable company, with stories leaking that Microsoft was in talks with Nokia to purchase their phone division earlier in the summer. That fell through, and most likely due to a low-ball offer. Microsoft's time crunch of finding a CEO, and the idea of having to spend a couple more billion dollars for a company whose stock price is trending higher, meant that it was critical for Microsoft to act as soon as possible. The synergies between Microsoft's Windows 8 ecosystem and Nokia's handset business are too large to ignore, and will vastly help Microsoft leverage all the resources necessary to make Windows 8 a long-term success.
Fasten Your Seatbelts
The dynamic effect this potential acquisition will have on both companies will be profound, especially for Nokia and its shareholders. The question is how will the market digest this information, and is $5 billion a fair price for Nokia's most recognized business? It's hard to believe that Microsoft is obtaining Nokia's phone division for less money than Nokia paid for Navteq back in 2007. This may possibly be one of Microsoft's greatest investments, but I don't expect it to go over smoothly.
Shareholder approval is necessary for the deal to go through, and although currently Nokia's phone division is still digging itself out of a massive hole, the potential value of it could pale in comparison to Microsoft's offer a few years from now. As a long Nokia shareholder, I believe it's wise to hold on to your shares for the time being. While Nokia's phone division is struggling, they do have leverage. The company's next earnings report will illustrate an accurate depiction of how valuable and how much potential Nokia's phone unit actually has. If numbers are impressive, expect pressure from shareholders and an increase in the buyout offer. Nokia isn't going anywhere, hold on, and expect a sharp appreciation in Nokia's share price between now and when the deal is expected to close in Q1 of 2014.
One company that may be feeling distraught after this newsbreak is BlackBerry. The company, which has been trying to sell itself for more than a year, has just lost a potential suitor, and one that many people thought was a likely deal. Many investors and commentators penned the idea that BlackBerry would most likely be bought out by Microsoft for their enterprise value and patents. But with Microsoft and Nokia eating away at BlackBerry's core customer base, and an aging patent portfolio, it looks like BlackBerry continues to be a sitting duck with one less suitor for a potential take over. The fight for business clients is officially on, and with Microsoft in full control of the hardware, they will be able to streamline their enterprise offerings and be more of a threat to BlackBerry than they already are today.
As a long-term shareholder of Nokia, and a believer in the company, it is difficult for me to wrap my head around the idea of a partial acquisition by Microsoft. After only a few hours of digestion, it is still difficult to truly determine if this offer is fair. From a short-term perspective, this deal looks like the true catalyst that can help propel Nokia's share price back to levels when Elop first grabbed the reins of the company in 2010. However, from a long-term perspective, this deal seems questionable at best, and may limit the true potential of Nokia and its share price down the line. $5 billion seems like chump change for a business division that once ruled the phone market. And the thought of what the division could be worth in the future if all of Nokia's turnaround efforts come into fruition may be hard for investors to stomach if the deal eventually goes through.