Did Nokia Sell Out To Microsoft Too Soon?

| About: Nokia Corporation (NOK)

The deal

In the past week Microsoft (NASDAQ:MSFT) and Nokia (NYSE:NOK) have reached an agreement, after many months of negotiations, for Nokia to sell its handset division, in its entirety, to Microsoft, for the price of $7.2 billion; this includes $2.2 billion for a 10 year license for Nokia's extensive patent portfolio.

However, whilst agreed upon by both parties in principle, it will not be completed until November 19th, when Nokia's shareholders will have a chance to vote on whether to accept or reject the Microsoft deal.

Therefore, the question before you, as a shareholder, is do you believe that the money being offered represents fair value for the handset division and the potential future profits, if any, that are being sold off?

Reasons not to sell

After a number of re-boots the Windows Phone momentum has been growing; Nokia sold 7.4 million Lumia's last month - a 30% jump, and reached a market high in Europe at an 8.2% share.

More developers are coming around to the platform, every week there is a big name app released, and day by day this is becoming less and less of an issue.

All of the hardware and software barriers will be soon be gone. A lack of support for the latest hardware, and a number of requested missing features have been holding the platform back; both of these issues should be addressed within the next four to six months with the release of GDR3 (supports updated hardware), and an update to the OS with version 8.1.

Of late, Nokia have been cranking out hardware at a frantic pace, every week or two there is a leak or a rumor of a new Nokia device, and each successive model has built upon Nokia's design language; from the beautiful, but hefty, Lumia 920, to the more refined and slimmed down version, the Lumia 925; to the latest release, the remarkable Lumia 1020, which packs an incredible camera in an elegant design; right now Nokia is leading the pack in imaging, and every camera phone that's released is compared to the current King -- the Lumia 1020, with more models on the way, there appears to be no let-up in pace.

Microsoft's own projections are to sell 255 million smartphones a year in 2018; if Microsoft achieves this Nokia could have been worth as much as $150 billion if it had stayed independent.

Nokia have had a huge hit with the Lumia 520 which very quickly became its bestselling smartphone; with the release of the 625, another budget smartphone, perhaps it has another big hit on its hands?

Reasons to take the money and run

The US has been particularly difficult, carriers have a stranglehold over the market and consumers haven't warmed to Windows Phones. The needle has barely budged above 3% market share despite all the money and resources that both Nokia and Microsoft have thrown at the US.

Feature phone sales have been rapidly declining, and the competition is fierce; smartphone sales have been increasing, but not fast enough to make up for the decline in feature phones.

The market has reacted very positively to the sale; the stock that was trading at $3.90 before the announcement is now hovering around $5.50 per share, and if the deal is not accepted the stock would most likely plummet back below $4.00 per share.

Without the handset division Nokia, overnight, becomes a profitable company that can focus on its three remaining business units.

Some breathing room

As the deal has not yet been finalized there is some wiggle room to see what shakes out; Nokia will release one more quarter's earnings before the vote, and if smartphones deliver another 30% + growth quarter it will make things very interesting indeed. At 10 million units a quarter Nokia is not far off breakeven for smartphones, and if the feature phones hold steady or even show an uptick there could be a reason for pause.

At this point shareholders may consider that MSFT is getting in right before Nokia turnsthe corner, and if this does happen the option is either for MSFT to sweeten the deal, or the motion could be voted down.


Investors should keep a careful eye on the numbers in the next quarter's earnings report and also follow the monthly stats that are released for smartphone usage. If Nokia continue growing Lumia sales at 30% a quarter there could be significant opportunity for Microsoft to sweeten the deal or Nokia's shareholders may realize that they have sold too cheaply and the deal could be off.

By holding the stock you get a free spin of the wheel, if the numbers aren't great the deal continues as agreed, but if they surprise to the upside suddenly Nokia will find itself in a strong bargaining position.

Disclosure: I am long NOK. 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.

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