A few months ago, Microsoft Corporation (NASDAQ:MSFT) announced the acquisition of Nokia Corporation's (NYSE:NOK) smartphone business for $7.7 billion. Considering the size and popularity of the two companies, the news caused a lot of hype. There are several ups and downs that are associated with this merger so let me throw some light on a few major issues.
Decelerating Revenue Growth
The top and bottom line performance of Nokia has remained dismal over the recent quarters with a fluctuating bottom line and negative revenue growth since the first quarter of 2013. These figures have put investors in a dilemma whether to remain invested in the stock or to let go of the investment.
Both of Nokia's segments, devices and services and Nokia solutions and networks (NSN), have showed negative growth in revenues over the recent quarters. Mid-2013 the company announced it would part from its mobile phone business after being beaten by Apple Inc.'s (NASDAQ:AAPL) iPhone time and again. Note that Nokia used to rule about 50% of the total market back in its good days; the company's market share is something around 3% now.
The company secured votes from 99% of the shareholders in support of its decision to separate the floundering business segment while BOD recommended the same. Letting go of underperforming segments always improves the future prospects of the company. The positive investor sentiment reflects in the swelling stock price of the company; following the announcement of the sale of this segment Nokia's price has increased by about 97%.
However, as mentioned earlier, the problem has not just been with its mobile business; the NSN segment has remained weak. Revenue from the NSN segment fell by 22% YoY as of the fourth-quarter earnings report. This is material since the segment will be responsible for generating 99% of the company's revenues after the sale of its mobile business.
US Is a Lucrative Market
The company is struggling aggressively to focus on its NSN business which is now a core business for Nokia. The shifted focus has led to a number of divestments and investments. Recent quarter financials indicate that the company showed vastly negative performance in all the geographical regions besides North America. In view of the fact that spending on building faster networks and improved service in the US exceeds those of other developed regions like Europe, America is a vitally important region for the survival of NSN. Therefore, the company is now planning to increase its penetration of the US market with its NSN business. As per the recent quarter's report, North America accounts for approximately 11% of the total revenues from continuing operations. China could have been a great investment opportunity for the company had the country's local players like Huawei Technologies Co. Ltd. and ZTE Corporation (OTCPK:ZTCOY) not been favored against their Western counterparts like Nokia. Chinese players are banned from the US owing to security concerns so the US has become a highly lucrative market for Nokia.
Nokia builds wireless infrastructure for 2G, 3G, and 4G networks. The company is expanding its partnership with Juniper Networks Inc. (NYSE:JNPR) that deals majorly in IP routers and switches. This will hugely help Nokia's NSN to maintain a stronger foothold in the US region given that 50% of Juniper's revenues are extracted from two leading network providers in the American region: Verizon Communications Inc (NYSE:VZ) and AT&T Inc (NYSE:T). In fact, 67% of Juniper's revenues pour in from service providers. Thus the Nokia-Juniper partnership would bolster Nokia's top line with the addition of US carriers into its client base.
In addition to its partnership enhancement with Juniper the company has gotten a break with Sprint Corporation (NYSE:S) as well. NSN's long standing customer Softbank Corp. bought a 78% stake in Sprint for $21.6 billion in mid-2013. Sprint will now be using the NSN infrastructure in addition to two other suppliers to roll out its planned network upgrade (4G). This deal between Sprint and Softbank has put Nokia ahead of Ericsson (NASDAQ:ERIC). Sprint is planning to utilize the inflows from the acquisition to expand its service distribution to densely populated areas; the network provider is developing a 4G TD-LTE network that would cover around 100 million PoPs by the end of the present year. This would put Sprint in direct competition with leading rival firms Verizon and AT&T.
Taiwan Mobile Co. Ltd. has also selected NSN as a sole supplier for its LTE Advanced Network rollout. NSN is reportedly the only supplier of Taiwan Mobile's 2G, 3G, and 4G networks now.
Dispute in India and its Consequences
Despite the plans to strengthen the NSN segment Nokia is not a great investment. Note that the Microsoft-Nokia deal is not yet complete. The deal that was supposed to be finished in the first quarter of 2014 is now facing additional problems as Indian courts froze Nokia's asset transfer owing to a legal dispute. The ruling upheld by the Supreme Court of India poses critical hurdles for the company. The courts have ordered Nokia to pay a $572.5 million guarantee prior to transferring assets to Microsoft. This ongoing dispute has forced Nokia to consider a plant shutdown in India. Considering that Chennai plant is one of the biggest phone manufacturing plants of Nokia it would entail a much lower payment to be received from Microsoft in exchange for transfer of ownership to mobile segment assets and patents.
Furthermore, do not forget that the company has not commenced paying dividends yet. Thus there are no profits for investors. Analysts' estimates indicate that the company's top line will grow by no more than 5% per annum for the next five years compared to the industry growth rate of about 17%.
While the company is making some great moves to reorganize its business and become more focused on its better manageable segment, the dispute in India has turned the tables. It looks unlikely that the company will be able to turn the decision in its favor. If the company pays off the charges it will further deteriorate its cash to market cap ratio that is already less than half of its peers'. I have already discussed the consequences of shutting down the plant. Nokia does not look like a great investment opportunity to me right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.