“Not for sale!” is the sign Nokia (NOK) CEO Stephen Elop has placed on the windows at corporate headquarters these days, as he continues to fend off rumors of a takeover.
A rumor of a Nokia buyout is not news these days. It started back in February when the company essentially “gave in” and came to terms with Microsoft (MSFT) to make its smart phone operating system the standard for all Nokia phones. What exacerbated the rumor was that Elop is a former Microsoft executive, heading its business division.
Last week rumors spread that Nokia’s phone business was going to be acquired by Microsoft for $19 billion; talks involving a potential Samsung (GM:SSNLF) deal have also entered the conversation. But the common denominator in all of this innuendo is that a once-prominent tech giant has fallen to such a drastic level where it will likely not survive on its own.
I wrote a piece last week where I said it may not yet be time to write off the company, and I stand by it. This was in the face of the company having warned it might not book a profit in its core cellphone business this quarter, as the struggles in the smart phone market are increasingly dominated by nimbler rivals such as Google Inc. (GOOG) and Apple Inc. (AAPL). The profit warning also led analysts to predict Nokia’s days as the largest mobile phone company in the world could be numbered, with one suggesting its market share could be cut to just 15 percent by the time it launches its Microsoft Windows 7 smart phone. It has, by its own admission, been a tough couple of years.
So the question now is: If Microsoft is not going to buy out Nokia, will the joint-venture bring customers and investors back to the company? That remains to be seen, but it appears the partnership between the two companies has spurred little optimism. Investors seemingly had every reason to be skeptical when Nokia announced the new alliance: The stock lost 14% on that news alone. It seemed investors realized that two “has-been” technology giants forming a partnership do not necessarily inspire confidence.
Nokia has now lost 75% of its market value in the last four years. Though it may still be one of the giants in the mobile phone industry, it has seen its market share plummet to drastic lows over the last 12 months. This really has left me scratching my head. How is it possible that a company can be both #1 in its industry and still be this much in trouble? I have researched as far back as possible and I have not been able to recall another time when this has happened.
How did things get so bad?
Investors can answer this question in one word; Apple. Its iPhone dominance and overall success in the smart phone market has been well documented and is probably the single biggest reason behind Nokia's struggles. The technological breakthroughs from the iPhone changed the game forever, and Nokia was nowhere near ready to compete on that basis. To a lesser degree, Research in Motion's (RIMM) Blackberry has always been a big player in corporate circles, though it's now facing challenges as well. Its early entry into the smart phone market, as well as its success, contributed to the loss share that Nokia has had to absorb.
The bottom line
While Nokia will continue to do what it can to fight off buyout rumors, it will need to do more to focus on how it can remain relevant. With a market cap of $30.89 billion, it's trading with a low P/E ratio of 11.61 and forward P/E ratio of 10.84. Nokia also has a high beta value of 1.58. EPS decreased by 9.64% annually in the previous five years. However, in the next five years, Nokia is estimated to have an EPS growth of 5.63%. While I believe the company is on solid fundamental grounds, it should not continue to ignore a buyout -- something I feel may ultimately be in its best interests.