Microsoft (MSFT) has effectively hammered the last nail into BlackBerry's (BBRY) coffin, after the tech giant acquired Nokia's (NOK) mobile handset division and specific licensing rights for upwards of $7 billion. Speculation over who would buy Nokia intensified after rumors of a deal surfaced back in June. Similarly for physical keyboard obsessed BlackBerry, speculation over who would acquire them continues to run wild, with Microsoft's name constantly being tossed up. BlackBerry has been looking for potential suitors for more than a year. While BlackBerry's solid cash position, modest patent portfolio, and enterprise division seem like an attractive fit for Microsoft, actual synergies between the two companies and their product lines are almost nonexistent, which is why BlackBerry's future prospects of a Microsoft tie-up were crushed by Nokia. The future for BlackBerry looks grim, and after the smoke settled between Nokia and Microsoft, it seems clear that BlackBerry shareholders are holding onto dead weight. While the company and/or its divisions will most likely be broken up and sold off in the near future, BlackBerry shareholders should not expect a price move similar to Nokia's recent two-week tear, and they should anticipate the possibility of BlackBerry selling off at a discount, or no premium at all. Current shares are priced at $10.28. Shareholders should consider closing most or all of their position in BlackBerry and opening a long position in Nokia, who has an extremely solid future. Nokia is in it for the long haul.
The Lack Of Synergy Between Microsoft And Blackberry
Synergy is key. For any successful merger to occur, there needs to be a high level of synergy between the two companies. Integration is crucial among all levels of the combined business, from the employees, to the products, to the management style. Synergy is a word that gets thrown around a lot, and some people fail to realize how basic, yet important the word is.
Synergy is the interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual efforts
After reading the definition of synergy, the deal between Microsoft and Nokia makes perfect sense. Microsoft is now able to control both the popular hardware that has captured more than 80% of the WP market, and software for their phones, which tends to create a better experience for the end user. This combined company will continue to make great strides overseas with regards to Windows Phone growth, and a new lineup of innovative hardware will help push the envelope even further and give hope for significant growth in the US.
If you read the above definition one more time, and swap BlackBerry in for Nokia, you may come to the conclusion that the integration between BlackBerry and Microsoft would be extremely difficult, let alone the integration between BlackBerry, Microsoft, and Nokia. BlackBerry has cash (more than $3 billion), a mobile phone division, an enterprise business, and a modest patent portfolio to offer Microsoft. Meanwhile, Microsoft's cash position is the least of its concerns. BlackBerry's mobile division is at its lowest low, runs on a completely different OS, and has inferior hardware when compared to Nokia and their acclaimed cameras. BlackBerry's enterprise division is starting to erode at a rapid pace by competition from Microsoft and Nokia, and BlackBerry's patent portfolio pales in comparison to the quality and quantity of Nokia's patent portfolio. It is safe to say that the synergies between BlackBerry and Microsoft are minimal at best, and the only way I would see a merger between the two is if a certain division of BlackBerry was sold at a discount.
Jefferies analyst Peter Misek laid out his three reasons for why BlackBerry would be an attractive takeover target for Microsoft.
Microsoft would be "1) The definitive #3 handset player with better carrier access and production economies of scale; 2) the leader in enterprise mobile devices with support from the U.S. gov't; 3) a key player in MDM, an area they would love to get into and purchasing private leaders in the space would be pricey."
To counter, 1) Microsoft's Windows Phone already is the definitive #3 handset player, with the IDC estimating that by the close of 2013, Windows Phone will have 3.9% of the market share, compared to 2.7% for BlackBerry. Furthermore, the research firm projects that by 2017, Microsoft will control 10.2% of the smart phone market share, while BlackBerry will control 1.7%. 2) With BlackBerry slowly fading away, and Nokia recently picking up a lot of BlackBerry's former business customers, why would Microsoft buy out a business they themselves are stealing customers from? As Windows continues to grow, BlackBerry will continue to diminish. 3) Windows has an incredibly small footprint in the MDM space, competing with their product "Windows Intune". While BlackBerry's MDM division is very strong, I believe these customers will start to make the switch when more enterprise begins to take on Windows Phone.
In short, why would Microsoft buy BlackBerry and risk a shareholder revolt over the swift acquisition of two phone companies that investors see as incredibly risky, when they can just eat away at BlackBerry's core customers for the time being.
Nokia's stock has outperformed BlackBerry's ever since the latter's disastrous earnings report was released in late June. Since then, Nokia has passed BlackBerry in smart phone shipments, and is now solidly outperforming the company. Expect this trend to continue as Nokia's Lumia phone sales continue to outpace BlackBerry's.
Nokia Is As Solid As A Rock
Investors who are looking to jump into Nokia should take a step back and look into the overall history of the Finnish company. The company, more than 150 years old, has managed to survive world wars and severe times of economic distress thanks to a solid business operation in many different industries. Since inception, Nokia has manufactured paper, communication cables, consumer electronics, including phones, televisions, and computers, generated and distributed electricity, produced various rubber products ranging from car tires to boots, and more. The list goes on and on. The recent divestment of Nokia's unprofitable phone unit is just another one for Nokia's history books. Solid finances and strong future prospects ensure that this company will be around for the foreseeable future.
Nokia shareholders have a lot to look forward too. Nokia's map division is growing fast, especially in the automobile market, and should eventually reach sustainable profitability. They're NSN division has been posting strong profitability in recent quarters, and contract wins with China Mobile will help build up Nokia's momentum. And now without a mobile phone division, Nokia will be able to fully utilize their massive patent portfolio that has been funded by more than $40 billion in research and development over the past decade and reach settlements with major smart phone manufacturers. Nokia's divestment of a cash burning division that hasn't been profitable for years has made Nokia a star among analysts since the takeover deal. Nokia has constantly been receiving upgrades from analysts, which will help the company propel to higher share prices.
The prospect of a special dividend after the closing of this deal in early 2014 is also very possible. The company suspended its dividend in January of 2013 due to financial constraints, and now the reimplementation of said dividend seems extremely likely.
The prospect of Nokia purchasing Alcactel-Lucent's (ALU) wireless division, and even the company as a whole, has been a talked about rumor since Nokia will now be heavily focusing on its most profitable business, Nokia Solution Networks. Alcatel's shares have rallied 20% since the Nokia announcement. If Nokia does go through with the acquisition, or decides to create a joint venture similar to their previous one with Siemens, it may be a great long-term growth play, at least one analyst thinks so.
Finally, Nokia will be able to jump back in the mobile phone business in 2016. While the mobile landscape may be flipped upside down by then, with wearable technology slowly gaining traction, Nokia could become a formidable challenger to the likes of Samsung (OTC:SSNLF) and Apple (AAPL) after they are released from Microsoft's shackles and able to produce android based phones. Recent news breaking that claimed Nokia had an android lineup ready for 2014 shows how strong this company can be, and it seems more likely that Microsoft's $7 billion buyout was not only to gain a key executive, Stephen Elop, but to also delay Nokia from releasing award winning hardware for android by two more years.
It is expected that Nokia's advanced technologies division will continue making strides in mobile technology, and these advancements could later be implemented in Nokia's future hardware that would set them apart from the competition. Nokia will be able to produce both Windows and Android phones beginning in 2016, which makes this stock a great long term play. At these levels, the opportunities are tremendous, and the downside is limited. For long-term investors, Nokia is a must have.
This chart from Seeking Alpha contributor Wall Street Artist helps illustrate the solid upside potential Nokia has.
BlackBerry is in the midst of a slow and painful death, and Microsoft is eating them alive. As more and more time passes, the prospects of a spinoff for Research In Motion and their once popular BlackBerry series seems less and less attractive for current shareholders. The strong fundamentals for Nokia versus the questionable future of BlackBerry make it apparent that investors should sell BlackBerry and buy Nokia.