Nokia: It's About Sending A Message

| About: Nokia Corporation (NOK)
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Last week, when Nokia (NYSE:NOK) announced that it was buying the rest of Nokia Siemens Networks, many people wondered what it could mean for the investors. A lot of analysts attempted to examine the situation from a financial perspective but forgot about the most important part: the reasoning. Nokia decided to acquire NSN not only for fundamental reasons, but also to send a message. The message is loud and clear: Nokia is not up for sale.

In May, I wrote an article titled Nokia Is Not Up For Sale. In that article, I predicted that Nokia would buy the rest of Nokia Siemens Networks, which would support my point regarding whether Nokia was up for sale or not. If Nokia wanted to sell itself, it could spin off Nokia Siemens Networks, sell the mapping business to Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG) and allow Microsoft (NASDAQ:MSFT) to buy its phone business. Since the company decided to hold onto Nokia Siemens Networks, it is clear that Nokia's management wants to keep the company in one piece and under one management.

I understand that Nokia's "Plan B" is to sell itself to Microsoft. In fact, I discussed this idea exactly a year ago. On the other hand, I don't understand why Nokia should go ahead with the Plan B if the Plan A hasn't failed yet. After all, the goal of Plan B is to save the company from death in case Plan A fails. If Plan A is still going on with some success, there is no need for initiating Plan B for the time being.

Some analysts make it seem like Nokia's management is inconsistent. A lot of times people say things like "when will Nokia's management decide on what to do with the company?" and blame the company for giving out "mixed signals" even though this was never the case. In the last 2 years, Nokia's management has been saying the same things consistently and stubbornly. Every time the CEO Stephen Elop was asked about the fate of the company, every single time, he said "we will stick with Windows Phone project and see where it will take us." Yet, many people continue to misinterpret the things he says and claim that he's giving mixed signals.

The company stopped burning cash, has enough cushion to allow it to survive for a long time and its products are gaining a lot of attention around the world. There is very little reason for Nokia to throw the towel and sell either part or all of the company off. Microsoft could have bought Nokia last summer when the company was trading for $1.73 per share (with a cash position of $3.52 per share). Such move didn't happen because Nokia is committed to stand up on its own foot as long as it can afford to do so. Nokia's acquisition of Nokia Siemens Networks should not be interpreted as if the company will sell its handset business; it should be interpreted as another sign that Nokia wants to remain in one piece.

A few months ago, Terry Myerson, a vice president at Microsoft responsible for the Windows Phone products said that the company would only consider building a smartphone if its partners such as Nokia and HTC were unable to provide the consumers with a great Windows Phone experience. Basically, Mr. Myerson hinted that Microsoft would not be getting into the hardware business unless its partners (namely Nokia) became an absolute failure. In other words, a possible Microsoft acquisition of Nokia's handset business is a last resort if everything else fails. It's not something that will be done out of blue.

Nokia needs all three business units that it currently has: 1) the handset business, 2) Nokia Siemens Networks (soon to be renamed) and 3) HERE (also known as Nokia Maps and formerly known as Navteq). Last year, when Nokia's handset and mapping businesses failed to make a profit, its Nokia Siemens Networks generated enough positive cash flow to carry the rest of the company. This speaks volumes to the importance of Nokia keeping all its three business units intact. Unless Nokia is failing, there is no way it will sell its handset business.

In a couple weeks, we'll find out about Nokia's results. Sometimes, the company announces its results in advance, which means that Nokia's results could come at any day. The analysts expect Nokia to report a loss of 2 cents per share on revenue of $8.26 billion. This represents a drop of 10.90% in revenues as the company generated $9.67 billion in the same quarter last year (the company reported a loss of 10 cents per share in the same quarter). The company is expected to report a stronger quarter in smartphone sales which may be offset by the decline of revenue in the feature phones. After BlackBerry's bad miss, even if Nokia passes its analyst estimates by a tiny margin, it will be still encouraging.

Disclosure: I am long NOK, MSFT. 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.