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Sunil Shah
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A fund manager who cut his cloth in Schroders London. He joined Coronation South Africa in 1998, running the Smaller Companies Fund which had the best 5-yr record in the sector during his tenure. In 2005 he left Coronation to pursue his passion in writing (and invest without constraints). He... More
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  • Why Apple (AAPL) Should Suck Nokia (NOK) Onto Its Map 7 comments
    Oct 10, 2012 1:25 PM | about stocks: NOK, AAPL

    Why Apple (AAPL) should suck Nokia (NOK) onto its map

    The recent fiasco on Apple's mapping software may possibly be the company's biggest blunder in the company's unchequered past over the last five years. Their current solution is to attempt to beef up maps in-house. This will take months. In my opinion a company with Apple's reputation for excellence in design, user-friendliness and innovation cannot afford to take months. Their supreme franchise, along with their unparalleled margins are at stake.

    There is a much better solution. Buy Nokia.

    First let's examine the intrinsic appeal of Nokia's mapping division, Navteq. It's currently installed as the GPS system on 4 of 5 new cars with a Global Positioning Satellite system. Not only does it use GPS co-ordinates for mobile telephony, but also refines its accuracy using cell masts to better locate a shop or restaurant in a large building. In other words, for a mobile experience, it's the best out there.

    In my opinion a smartphone has four essential functions, the non-negotiables: making calls & sms's, a camera, a browser facility and an accurate mapping function. The supplementary functions are bells and whistles, that are nice to have and clearly, Apple excels at them. However, for the world's best-selling, premium-priced phone not to possess one of the four essential legs is anathema, a grave risk to their dominance and ascent.

    As for price, Nokia purchased Navteq for $12bn about two years ago. The entire market cap of Nokia currently stands at $10bn with $4bn net cash on Nokia's balance sheet. Simplistically all else cancelling out, Aapl would bag it for $6bn at today's price. Even if AAPL paid a 100% premium for Nokia, maps (along with a lot else - see below) would be theirs for a net $16bn, net of Nokia's cash.

    In other words, for a paltry 3% of the company's market cap, Apple would solve their mapping fiasco immediately and definitively. There would be a number of other significant benefits . . .

    Why would this be a stroke of genius?

    What this would also do is eliminate a potential threat in the form of Nokia's resurgence. The Lumia series has received excellent technical reviews. Despite some marketing blunders and delays with Windows Phone 8, there is a very real threat that Nokia's new smartphone range will tarnish the IPhone's eminence. In one fell swoop, this threat would be eliminated.

    There would be another major coup: Microsoft's plans to develop into the third mobile ecosystem would be seriously scuppered. Nokia is a major partner in Microsoft's herculean effort to prevent their displacement, as the user shifts further and further away from the desktop to the smartphone as his/her preferred interface with the digital world. Without Nokia, Microsoft's efforts would be enormously hampered - Nokia is their preferred partner, and hey presto it disappears!

    Nokia has 30,000 cellphone-related patents developed and licensed over the last two decades. Apple's recent win over Samsung over patent infringement must mean that patent portfolio is very valuable. Can you imagine the other cellphone manufacturers quaking in their shoes if these patents now belonged to Apple, a company with the time and money to pursue them relentlessly? I certainly can.

    The Hurdles are not insurmountable

    This is not a simple transaction. Nokia has many divisions, 114,000 employees and there will be complications:

    Anti-trust Veto unlikely

    Remember Nokia's market share in smartphones has fallen to 2% recently, as they abandoned their Symbian operating system and transition to Windows Phone 8. This per se, would not pose a regulatory hurdle.

    As for their 'dumbphone' division (number 2 globally), that's not Apple's business and they can commit to divesting it in a year.

    What about the 114,000 employees?

    Divest the businesses or lay them off. Capital markets are not a branch of moral philosophy. It's not Apple's core business to manufacture low-margin products. A policy of a blanket redundancy program could be introduced, where each employee has to then prove they belong within their new parent. I'm willing to bet there are lots of engineers and design staff within Nokia that would have decent prospects at Apple. As for 'dumbphone' manufacture and the Nokia-Siemens-Network division: goodbye.

    One must also note that Nokia has already begun the path of restructuring (the pension is already fully funded and mostly of a defined-contribution nature). Yes there may be additional unforeseen costs, but I'm sure SA readers will point them out!

    Remember, it's location, location, location. Apple needs maps now.

    Disclosure: I am long Nokia and indifferent to Apple

    Disclosure: I am long NOK.

    Stocks: NOK, AAPL
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Comments (7)
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  • Microsoft won't let it happen. Also, we don't know what agreement they have with Nokia. I hope they do buy Nokia, I could retire.
    11 Oct 2012, 04:04 PM Reply Like
  • I'm sure the strategic agreement with MSFT has a right of first refusal tie in on an management control changes. This would put Apple in a direct bidding war with MSFT. Great for Nokia shareholders, but something I think Apple would prefer to avoid. Apple might be better off spending a hell of a lot less for something like Tom Tom, the owner of TeleAtlas. Sure, it's not at the same level as Navteq and would require additional investments, but Apple is already well along in this patchwork acquisition exercise.

     

    In any event, I think Apple is going to throw billions at this problem. Still...it will be cheaper than the control premium it would be paying for a company like Nokia.

     

    The big downside is related to time. But Apple could spend hundreds of millions patching this hole with a comprehensive license for a hi quality app like Garmin...which is Navteq powered. I'm sure it could use its massive leverage to get a Garmin navigation app on every IOS 6 phone for a fraction of what is charged to individual iPhone consumers.

     

    LONG: NOK
    18 Oct 2012, 02:18 PM Reply Like
  • Nokia bought Navteq something like 10 years ago, not 2 years ago as you mention.

     

    Laying off 114.000 employees? Come on. Do you know how much that costs? The management effort? The PR disaster? Do you know what happened to Nokia when they laid off some hundreds of employees in Germany (Bochum)? The immediate effect on their market share in Germany? Also, it would not even be so easy to get rid of Nokia Siemens Networks, as it is owned 50-50 between Nokia and Siemens.

     

    And all that trouble for some maps, which are anyway available to nearly world and dog in the industry? Have you ever heard Apple wants to become a mapping company? In addition that the stated problem IS NOT THE MAPS data they have, as they are getting the from TOM-TOM. The problem is with the logic they have built on top.

     

    And don't come now with the patents story, as only the Gnomes of Zürich are able to outspend Apple in innovative tasks such as litigation anyway.

     

    I tell you, the day that Apple buys a company with 114.000 people, which need to be laid off, not even Saint Fanboy himself will be able to save them from disaster...

     

    16 Nov 2012, 03:50 PM Reply Like
  • Author’s reply » and by the way, the Lumia was sold out in pre orders in Germany.
    16 Nov 2012, 04:11 PM Reply Like
  • Author’s reply » @Toni Maroni, Capital markets aren't an extension of moral philosphy. This is precisely the misguided convoluted logic that destroyed manufacturing in the US. Apple outsources virtually all its manufacturing. And it's done in Asia. If Nokia plants in Europe are intrinsically uneconomic, then you can try farting against thunder, I wont.

     

    Apple doesn't have to do the 'dirty work'. They could easily convince/coerce one of their outsourcing suppliers to do that for them. You know, "take this division or we're considering diversifying our manufacturing base to other suppliers ".... Easy!

     

    And by the way Apple having a mapping function which makes finding your derriere difficult is going to hurt big time soon.

     

    I repeat: commit to divesting dumb phone manufacture in a year when Apple buys Nokia. And sell it to whoever thinks they can yield a profit. And there are a number of Asian low-cost OEM's who'd love to give it a bash.
    16 Nov 2012, 04:04 PM Reply Like
  • Author’s reply » @tony one more thing (as someone would have said). It was 5 years ago, so I'm closer by 3. :)
    Nokia Buys Software Maker for $8.1 Billion

     

    By KEVIN J. O’BRIEN
    Published: October 1, 2007
    BERLIN, Oct. 1 — Nokia, the world’s biggest cellphone maker, said today that it had agreed to pay $8.1 billion for Navteq, the maker of digital mapping and navigational software based in Chicago, as it seeks to migrate satellite-based location services onto its range of phones.
    16 Nov 2012, 04:41 PM Reply Like
  • And now Here is here!
    20 Nov 2012, 03:45 PM Reply Like
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