by Daniel Jennings
Nokia (NOK) received another piece of devastating news recently. Finland will not bail Nokia out by purchasing its shares. The nation's prime minister, Jyrki Katainen, bluntly told reporters that Nokia's problems are none of the government's business. But is this news really devastating? In this article, I will explain how Finland's decision not to buy Nokia stock might be a catalyst for Nokia's turnaround which could lead to a buyout.
Nokia is one of the largest countries based in Finland, and it once accounted for 4% of the nation's economy. That means its success is important to Finland's future, but not as important enough to gamble on the company's future. Katainen has essentially admitted that Nokia's stock is worthless, so even the Finnish government considers Nokia's stock a really bad risk and wants to stay away from it. It is easy to see why Nokia has been dropping to new lows in the world's markets.
There has been a national debate in Finland about bailing out Nokia. Some Finns would like the government to buy in and protect it from a foreign takeover. The government disagrees, and obviously thinks protecting the country's AAA bond rating is more important than national pride.
This news will obviously hasten the decline of Nokia share values because a Finnish government bailout would have been the cheapest method of reorganizing the company. Without government cash, Nokia will need to take other steps, such as bankruptcy.
A government bailout could have enabled Nokia to take the bold steps necessary to save the company. One of those steps would have been to adapt Google (GOOG) Android, in addition to Microsoft (MSFT) Windows Phone. That would have given Nokia the ability to quickly expand its market base.
A bailout could have allowed Nokia to reorganize as much as General Motors (GM) did when the U.S. government bailed it out. General Motors was able to reorganize, modernize, and rationalize its manufacturing and successfully expand into growing markets such as China. A similar deal from the Finnish would have given Nokia the chance to undertake a similar drastic reorganization.
Nokia's shares fell by 1.5% when news of the prime minister's remarks hit the wires. Expect the Nokia decline to continue for the foreseeable future. Drastic action is needed to save Nokia at this point. That action will have to take place without the help of the Finnish government.
Nokia Could now be a Takeover Target
The Prime Minister's announcement could also make Nokia a likely takeover target. If the Finnish government will not protect Nokia, other companies will be more likely to take a chance on buying the company to get its intellectual property rights and other assets.
A takeover or merger would be the best way to save Nokia at this point because it could infuse it with cash and give it the resources to survive. If Nokia cannot do that, it will have to take other actions, such as selling off its vast store of patents.
No company would have been likely to attempt to take over Nokia as long as the Finnish government owned a large piece of it. Now that the Finnish government has announced that Nokia must sink or swim, it is a takeover target.
One likely bidder for Nokia is Google, which already owns Motorola. Google bought Motorola for its stockpile of patents, and it might do the same with Nokia. A Google buyout might boost Google's stock, but it probably wouldn't help Nokia's. If Google bought Nokia, it would probably fold it into Motorola. Other potential Nokia buyers include Apple (AAPL) and Samsung (SSNLF.PK), which might be in the market for Nokia's patents as well.
Samsung might want Nokia's patents in order to protect it from patent infringement lawsuits such as the one barring its Galaxy Nexus from sale in the United States. Apple was able to successfully argue that Samsung had violated its patents. Samsung could use Nokia's patents to protect itself from Apple lawsuits.
Microsoft might try to capitalize on its relationship with Nokia by bringing the company into the family. Nokia's cell phone design and manufacturing abilities would help Microsoft in its attempt to expand in the smartphone arena. As with a Google takeover, a Microsoft move on Nokia probably wouldn't help its stock.
Other companies that might be in the market for Nokia include HTC and LG Electronics. These major smartphone makers would certainly benefit from Nokia's patent stash. They might also use the Nokia brand name to build market share. Unlike Nokia, these giants have taken advantage of low-cost manufacturing in China.
Nokia stock has now fallen so low that a takeover probably wouldn't raise its value. The only thing that would increase Nokia's share value at this point would be a drastic reorganization or large increases in sales. The reorganization has begun, but the increase in sales is nowhere on the horizon.
Nokia is taking some drastic actions, including shutting down factories and research and development facilities. It's also cutting 10,000 jobs, mostly in Europe, in an effort to slash costs. This drastic action is probably too little, too late.
The job cut could help Nokia in the long run because it can switch to lower-cost Chinese production, much as Apple has. That could lead to long-term increases in both earnings per share and stock value at Nokia. Such gains would probably take a few years to take affect, so they wouldn't help Nokia's share value anytime soon.
The lack of a bailout raises some very interesting questions about Nokia for value investors. Is Nokia a good company with a good product that's just going through bad times, or is it finished? The market would say Nokia is finished, but how many times have we heard that about a company, only to have it come roaring back?
Apple is the most visible example of a company that was able to turn itself around. There are some interesting similarities between Nokia and Apple. Nokia is a former industry leader, and it has a good established brand, much as Apple did. It also still has a lot of market share, around 19.8% of the global market, and that's nothing to sneeze at.
A really good management team dedicated to taking drastic actions might actually be able to turn Nokia around. The current team has been willing to cut jobs and productions. If it is willing to go further and take such actions as moving Nokia production to China and adopting Android as its operating system, the team might be able to turn the company around.
So, Nokia might just have some life left in it yet, despite the Finnish government's unwillingness to bail it out. The company has some impressive assets, a good brand name, and quite a bit of market share left. This makes Nokia a company to watch, not to buy. Its stock is still a terrible risk, but there is still a lot of value there.
Finland's decision not to buy Nokia stock might be a catalyst for this turnaround to begin. The company won't be forced to keep expensive factories in Europe open in order to provide jobs for voters. It can cut production and costs, so the way for a Nokia revival could be cleared.
Any sign of a successful turnaround, such as increased sales or a decision to adopt Android, is likely to send Nokia shares up. Value investors should watch Nokia, but not buy yet, as it is still too early to tell if this company can be turned around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.