On September 2nd, the Board of Directors at Nokia (NOK) announced to the world they had sold the heart of their company to Microsoft (MSFT). The Devices & Services division had approximately 32,000 employees as of 2Q13 and generated just under half of the company's total revenue. Nevertheless, it was very much the core of the company. Currently, well over a billion people carry Nokia phones in their pockets. Their reputation for indestructibility has led them to be the most used second-hand phone on the planet with hundreds of millions of units changing hands every year. At the top end, their innovation is considerable, just in the last year alone, Nokia phones have been the first to introduce to the mass-market: super-sensitive touchscreens; wireless charging; and the incredible 41 megapixel Lumia 1020. So when we see Nokia ranked as the 22nd most powerful brand by Forbes, it is not due to the telecom infrastructure unit known as "NSN" which was only partially owned until a few months ago. Yet the board of directors now desires this part to be the new core of Nokia. With the considerable power boards wield compared to ordinary shareholders, they are quite likely to get their way. Before they do so however, before they ask ordinary shareholders to ratify their decisions, questions need to be asked.
I ask these questions not just as an investor, but as someone who deeply admired and continually returned to the company for their products' superior build quality. I also know, without false pride, that as someone who has studied and written about Nokia in detail, I know a little bit about the company. Of course this is nowhere near the level of Nokia employees, however as they cannot legally speak about this, I therefore consider it somewhat of a personal obligation to raise these questions.
I am saddened the company is about to cease to be what it is widely known and loved for. So, if the Board of Directors see it fit to gut the heart out of Nokia in exchange for $7.2 billion in cash, these questions merit answers. Technically, shareholders will be able to ask these questions on November 19th, the day this deal will be ratified. However, by then it will be too late to have any impact, questions thus need to be raised now.
Regarding the Deal particulars
- Why does Microsoft state it is acquiring 8,500 patents (page 23) but the Nokia conference call only states Microsoft will be given "non-exclusive license to its patents" - Who is correct? Is it therefore more correct to state that the $5 billion being paid for Devices & Services includes patents?
- It appears due to the loss of these and associated patents, Nokia will generate approximately $1.3 billion less in patent revenue per annum, a halving of its current patent revenue generation as indicated by the conference call. Does this not indicate that Nokia is underselling its Devices & Services division?
- What if Lumia sales exceed 10 million in 3Q13 and 12 million in 4Q13 as seemed possible pre-agreement? Will the price be renegotiated upwards?
- Why was Motorola worth more than Nokia? (Motorola was sold for $12.5 billion representing a 60% premium on share price. Nokia's Devices & Services division was sold for $7.2 billion.)
- Why was Skype worth more than Nokia to Microsoft? (Skype was bought for $8.5 billion)
- Please tell us why Xiaomi is worth more than twice as much as Nokia's Devices & Services Division? (Xiaomi, a tier-three Chinese manufacturer is valued at $10 billion by its latest venture capital equity boost).
- On what grounds would a phone range growing at 27%+ per quarter be sold for less than Xiaomi?
- Why did the board not create an open auction in the manner of BlackBerry? Why were negotiations so secretive? How does this maximise shareholder value?
Regarding Alternative Scenarios
- MSFT is expecting to sell 255 million smart phones per annum by 2018 along with $9 billion profit per annum. If Nokia had achieved similar figures, ceteris paribus, it would have been worth in excess of $150 billion. Why did the board not take this opportunity for Nokia themselves?
- If Nokia was expected to renegotiate with Microsoft in 2014, why did it not delay the deal? As it currently holds 85% of WP market-share, it would have a very strong negotiating position with Microsoft.
- Would Nokia have had the ability to pursue Android in 2014? Why was this opportunity not taken? (On page 4 of Microsoft's strategic rationale document, it states the Nokia-Microsoft agreement would have to be "recommitted" to in 2014).
- Why wasn't HERE included in the deal? The synergies with HERE and D&S are greater than with NSN.
- Why wasn't a direct minority equity stake by Microsoft considered? Would that not have offered Nokia greater benefits? For example through improving the company's debt rating and helping to increase its cash balances.
- 2 weeks ago, Nokia CFO Timo Ihamuotila reiterated that Nokia had a "strong cash position". He has made several similiar statements over many months of press releases and conference calls. Why does Nokia Chairman and now interim CEO Risto Siilasmaa state "Nokia alone does not have the resources" and use that as a rationale to sell D&S?
- Regarding 6, If the interim CEO's statement is correct, was the company expecting a deterioration in its cash position over the next 4 months even though these are traditionally the strongest sales months in the calendar? Would this delay not have enabled a better purchase price to be negotiated with Microsoft? Why was it imperative it be sold now?
- What guarantee is there that HERE will remain a key component of the WP platform? Microsoft has stated it will only license the platform, but not given any guarantees as to minimum royalty rates.
- Nokia has a strong brand name with the "Nokia Lumia" range. Why has the "Nokia" name not been licensed to Microsoft? This would have generated extra revenue for shareholders, especially as Nokia is contractually forbidden from building phones until the end of 2015.
- Were any of Stephen Elop, Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber involved in the negotiations with Microsoft? Why does this not present a conflict of interest? This is especially pertinent as they will all be joining Microsoft.
- Do you think Stephen Elop, former Nokia CEO will be content to be only an Executive Vice President? Is this only being done to keep Elop out of the limelight to ensure the deal is approved?
- It is strongly rumored Stephen Elop is likely to become next Microsoft CEO. Does this not present a conflict of interest?
- If shareholders have the right to vote on this deal - why was no guidance given that a key asset of Nokia was up for sale?
Regarding the Future
- Does the board believe that Devices & Services division would have been worth more or less after 4 months?
- Newspapers and websites throughout the world are currently writing obituaries on Nokia's demise. How do you think this will affect demand until the deal closes?
- It appears Microsoft is about to retire the "Lumia" name. Even if the deal does not go through, do you not think that such uncertainty in the air around the future of the Lumia range of phone will lead to a significant reduction in demand?
- With the ending of Symbian and with the ending of Windows phone 7, Nokia experienced notable reductions in smartphone volume. As Nokia is still the current owner of the Lumia range of phone, what reduction of demand does Nokia expect? Was this factored into the final valuation of the sale?
- Nokia's Device & Services division's significant traction with Lumia represented a tremendous opportunity for Nokia's share price to at least triple in value over the next 2 years. Do you think this is now more or less likely to happen?
Some of these questions may have easy answers, many do not. Now, due to the nature of the deal, I think it is quite probable it will be ratified on November 19th. This isn't because of any inherent merits to the transaction but because of the nature of modern stock ownership. With the prevalence of sophisticated traders using computer algorithms and the low amount of institutional shareholdings in Nokia, it appears that many new shareholders are now dependent on this deal closing to achieve their expected return on investment.
If the deal does not close at all, Nokia's share price will probably retreat back to sub-$4 or even less than it was these prior three months. However, it is also possible that questions such as the above being raised will flush out new bidders for Nokia and help raise the final purchase price. If Nokia must sell the part of it that made its name known across the world, it should at least go for a decent figure.
Finally, I hope it is apparent by now how I feel about this transaction. However, it is also apparent that the company is undergoing a fundamental re-evaluation by the market. With this expected infusion of cash, Nokia appears to now be considered a well-resourced telecoms infrastructure company with a broad patent portfolio. The recent bullish run could therefore continue right until the next quarterly earnings report around October 18th. The great irony to this being of course they already had a fantastic patent portfolio and a great telecoms infrastructure division before the Microsoft deal was made.
Now, there may be additional upside if the company receives further (or increased offers) for its Devices & Services division. Microsoft are committed to this deal and are highly unlikely to withdraw, I therefore see less downside risk to this stock than I have for many months, despite it being at 52-week highs.
Additional disclosure: I currently only have a small residual shareholding in Nokia