Last week, Nokia (NYSE:NOK) shocked a lot of people by selling its handheld devices business to Microsoft (MSFT) for $5 billion (plus $2 billion to license Nokia's patents for 10 years). The agreement between Microsoft and Nokia says that Nokia will not be able to use its brand name on any phones until 2015. Also, Nokia will not allow Microsoft to use Nokia's logo on any of its smartphones. Microsoft is only allowed to use the Nokia logo on feature phones.
While many people in Finland are almost mourning the news that Nokia phones are going to be history, the nature of the agreement between Microsoft and Nokia tells me that Nokia is definitely not done with the business of making phones. Let's think about it for a second, if Nokia was completely done with the idea of building phones forever, it would let Microsoft use its logo on smartphones and the agreement wouldn't have limited Nokia's usage of its own logo on its phones for only 2 years. The agreement could have said "Nokia will not be able to use its logo on its phones ever again," but it says "Nokia will not be able to use its logo on its phones until the end of 2015." This is loud and clear.
Since Nokia will be able to start making smartphones under its name after 2015, I expect the company to take advantage of this. We don't know who Nokia's CEO will be by then, but this may change a lot of things. If Nokia's new CEO has the same mindset as Stephen Elop, Nokia will continue to stick to Windows Phone ecosystem. If the new CEO is more open to use another operating system such as Android, we may see the company launching several phones in multiple operating systems. Of course, since Microsoft now has so much influence in Nokia, it will do its best to plant another one of its men in the company just to keep things safe. Then again, most pro-Microsoft executives in Nokia will already be working for Nokia, so things can take an interesting shape.
Just because Nokia will be able to build a smartphone with its logo after 2015 doesn't mean things will go easy for the company though. When Nokia phones come back, these phones might receive a similar reception to what Twinkies of Hostess did, but bringing Nokia phones back will be a tough job. According to the agreement between Microsoft and Nokia, about 32,000 employees of Nokia will be transferring to Microsoft. Basically, any Nokia employee who knows how to design, model, build, engineer and market a smartphone will have left the company. In order to bring its phones back, Nokia will have to hire thousands of employees who have expertise and experience in building smartphones. By then, some of the employees who transferred to Microsoft might end up coming back to Nokia; however, it will be tough to bring back the whole team.
This is where Nokia's cash becomes crucial. Microsoft is basically paying Nokia $5 billion for Nokia not to build any smartphones for 2 years. At the end of the 2-year period, Nokia might end up spending that much, or even more in order to start up its phone division again. If Nokia spends something like $10 billion to start up its smartphones division, then its decision to sell its phone business to Microsoft was a terrible decision. If it takes Nokia only a couple billion dollars to build itself a phone division, then it will have done a good job.
In Finland, there is a phone company called Jolla which is made up of ex-Nokia employees. In the last 5 years, Nokia had to lay-off thousands of people and some of these people joined forces to create a new company. These employees recently released a new phone which has the same name as the company, and the phone runs on Sailfish, which is an updated version of MeeGo, an operating system designed by Nokia prior to its adoption of the Windows Phone. Perhaps, Nokia could purchase this company to restart its devices business.
In an unrelated development, Microsoft agreed to lend Nokia $2.0 billion for the latter's purchase of the rest of NSN. Microsoft will receive convertible bonds, which is promises not to sell or convert for a few years. Because Nokia will use this money for its NSN purchase, the company will be able to hold onto its cash for the time being. Once Microsoft's transaction to buy Nokia's handheld device business completes, Nokia will have about $20 billion in gross cash and $10 billion in net cash. As I mentioned above, I expect Nokia to save some of this cash until 2015 in order to restart its phone devices business.
By 2015, we might be looking at a completely different market than today's market. Smartphone market is a rapidly moving and changing market. Just a few years ago, BlackBerry's (BBRY) operating system was dominant, which got replaced by iOS (AAPL), which couldn't hold onto its market share in the wake of emerging Android (GOOG). Windows Phone is growing at a slow but steady rate and it's difficult to predict how the environment will be shaped by 2015. For now, Nokia will sit back, relax and watch the war of ecosystems. At the end of the 2-year period, if we see Android totally killing Windows Phone, Nokia might join the ranks of Android. If Windows Phone gains a lot of market share, Nokia might join there. Perhaps, the company will make phones in both ecosystems or develop its own ecosystem.
While I am not too happy with Nokia's decision to sell its phone business to Microsoft, it is too early to mourn the "death of Nokia phones" yet. Nokia's management obviously plan on bringing Nokia phones back; otherwise they wouldn't have limited the terms of the agreement to 2015. I sold my Nokia shares for a nice profit, but I plan on buying some shares once the dust settles.
Disclosure: I am long BBRY, MSFT, AAPL. 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.
