Nokia (NOK) sold its Devices & Services division along with key patents this morning to Microsoft (MSFT) for $7.2bn. As someone who was firmly committed to the belief Nokia had great potential with its Lumia range of phones, this sale is very bittersweet for me. On one hand, the bump to Nokia's share price is welcome, on the other hand, it is very much the end of an era. I've collected some of my initial thoughts below and would love readers (many of you whom I've had the privilege to know through Seeking Alpha) to share theirs too in the comments.
1. Nokia is dead, Long live the New Nokia
It seems strange to think it now but Nokia began as a paper mill company in 1865. As it developed, it gradually began its original telecoms infrastructure business in the early 1900s. Of course, the primary means of telecommunication being the telegraph at the time! Gradually it continued to diversify making such products as tires and rubber boots. These divisions were eventually spun off leading to the creation of Nokian Tyres and Nokian Footwear. With the growth in cell phones, Nokia took the lead in the early 21st century leading to an astonishing 35%+ market share at its peak. Now, this part of Nokia has also gone the way of its rubber boots. With the Devices & Services division spin-off to Microsoft likely to be completed early next year.
Nokia, the company, will of course survive and it will be very much bolstered by this injection to its balance sheet. I had recently grown somewhat worried by the decline in its cash position created by the NSN acquisition, though Genesis Housing did alleviate some concerns. Nevertheless, this decline would have made it very expensive for Nokia to refinance. It will no longer have such worries and it is very likely that its creditworthiness ratings are about to shoot back up to A3 or better at Moody's. This will therefore easily knock off at least a couple of interest percentage points in any future debt raising by the company. It also looks like it is getting a soft loan from Microsoft of ~$2bn which will also help to bolster its balance sheet and reduce any near-term requirement to go to the capital markets.
2. If you're a Nokia long, you now own a Telecoms Infrastructure company
The above is of course fine, but it is worth bearing in mind that Nokia is no longer the purveyor of the Lumia and Asha line of phones. Not only that, but its feature phone business, which even though it will retain the name of "Nokia," will no longer be owned by the company itself. This leaves the rump of Nokia as the owner of HERE - a mapping division and NSN - a telecoms infrastructure division.
There have been plenty of articles written on the subject of HERE by fellow SA contributors, this one by Andreas Hopf is especially pertinent today. I think it's interesting and quite significant that Microsoft did not go ahead and purchase HERE. Clearly it did not see sufficient value in this division to purchase it. I also think it is a strange fit for NSN to effectively be the parent to a mapping company. I don't know what the future of HERE holds. Due to the bad blood between Microsoft and Google, it is quite likely that Windows Phones will continue to utilize HERE for the foreseeable future. However, it is also quite possible that a rapprochement between the two will lead to the development of Google Maps on WP8/9 which would kill HERE's mobile applications stone-dead.
This therefore leads any owner of Nokia shares to be now just the owners of NSN. I think it probable the company may even change its name to NSN to reflect its new reality. Instead of its primary competitors being the likes of Apple (AAPL) and Google (GOOG), its primary competitors will be the likes of ZTE, Huawei, Alcatel (ALU) and Ericsson (ERIC). Is there money to be made here? Absolutely. A hundred years ago, Nokia was laying down telegraph wires, in a 100 years' time, communication infrastructure will still be a key utility and will continue to generate increasing revenue.
However, I didn't buy Nokia shares to join in this multi-decade revenue growth. I liked the story of a beaten down stock which brought in a great CEO who had just started to turn it around. This story is no more which brings me to the next two points.
3. The Elop angle
Ever since Elop joined, there has been talk of him being a Microsoft "mole." I think this was unwarranted. Elop has always come across as a personable, likeable and humble CEO. He was also very focus-driven allowing him to turn around Nokia and push their phone development times down from 24 months to less than 6 (in some cases). These are also great characteristics to have and something which it is worth remembering Steve Ballmer, Microsoft CEO, is not often noted for.
However, we now have a situation where this former Microsoft employee has now sold his company's most exciting division back to the company he used to work for. It is also very probable he will be the new Microsoft CEO within the next 12 months. This does raise conflict of interest issues. Now, I think Elop acted in good faith. I also think that this is a better deal for him and Microsoft than it is for Nokia shareholders.
From his perspective, he will now be likely to become Microsoft CEO (I think this has already been decided in the affirmative) and bring with him a pre-packaged division which is key to one of Microsoft's most crucial future growth areas.
From Microsoft's perspective, spending $7.2bn to hire a promising CEO and bring on board the best parts of Nokia is also great business. While that might seem like a lot of money, it really isn't when we consider Microsoft's market cap went up $16bn in one day alone just on the news that Steve Ballmer was leaving.
From Nokia shareholders' perspective, their CEO has negotiated the sale of its Devices & Services division and will himself transfer over to Microsoft. Elop was a key asset for Nokia. This no longer holds true. If one bought into Nokia on the basis of the growth prospects of the Lumia range and due to the charisma of Elop, this story is firmly over which leads to the next point.
4. There is no more potential for Nokia to be a potential multi-bagger stock
Did I think the Lumia range had the potential to be a blockbuster product? Yes, absolutely. I think it was quite probable that by 4Q14, Nokia would be selling 20 million plus smartphones a quarter. This would have represented a three-fold increase on sales over 3Q13, itself a record-breaking quarter. With projected huge revenue growth, Nokia had the potential to be worth $10 plus within 12 months. This will no longer happen. The irony is of course that, the sales themselves will probably still happen. The Lumia range may still sell 20 million plus, but it will only change the Microsoft share price by a few percentage points and not offer any multi-bagger potential.
Having said this, I do think that the Microsoft brand is slightly damaged. I think Nokia had a great story to tell its customers about how the Lumia brand meant the company was back on the map. I myself bought into this. I won't quite feel the same amount of affection purchasing a phone from Microsoft. I knew my next phone was going to be a Nokia. I am not so sure if my next phone will be a Microsoft. They will have to do some very gifted brand management to retain many Nokia customers' loyalty.
5. I was right on some things about Nokia, I was also wrong on some things
Finally, through Seeking Alpha, I've had the privilege to write quite a few articles on Nokia. I've had a few hits. My personal favorite was writing an article on Nokia's supply chain which required a lot of work, but the positive comments made it very much worth for me. However, I also made some mistakes. Such as over-estimating how many phones Nokia would sell with the Lumia 928. For those mistakes, I can only apologize.
I would like to thank everyone for reading my articles on Nokia. I may still write a few stories on the company, especially since there may be more stories to tell over the next few months. However, in a way, my affection for the company itself is over. I will write instead only for the benefit of you, the reader. On that note, I'd just like to congratulate everyone who made a bundle on Nokia. I believe one particular reader made just over $1m, I won't embarrass him by mentioning who, but congratulations to him and everyone!
Additional disclosure: The vast majority of my position in Nokia has now been sold.