Nokia Clever Move to Buy-in Time for Two Years

09:11:00

Post Microsoft and Nokia announcement of pending acquisition of Nokia Handset business by Microsoft, many Finnish as well as Nokia Loyalist have gone into sinking mode. Most of the Nokia loyalist thinks that they may not see another iconic and innovative device again from Finland based Nokia.

My take on this is different and consider Nokia move as an excellent business decision. Nokia’s decision to adopt Window Mobile OS and phasing out of Symbian OS has triggered mass exodus of Symbian OS based Application developer to Android Mobile OS. The decision acted as gift for Android ecosystem and in turn faced taunting task to convince developer to adopt Windows Mobile OS ecosystem due to developer perception around closed environment Windows environment. For the last 11 quarter, both Nokia and Microsoft tried and invested heavily to create WM OS based application ecosystem and managed to have around 200k whereas competing OS such as iOS and Android ecosystem based applications reached around or more than Million. Post continuous failure to generate tier 2 revenue stream, most of the analyst started pointing out the show stopper of Windows Mobile OS based device low uptake.

Observing low Q-o-Q and Y-o-Y adoption growth of Lumia range of device even after drastic fall ASP, Nokia played really smart to stuck deal with Microsoft. The falling ASP, device volume, higher cash burn, higher restructuring cost, growing competition in emerging countries made Nokia realize that it is the right time to un-lock value from Handset business unit and to focus on growth centric Network and Mapping solution. Nokia managed excellent deal with Microsoft by keeping patents, network division, mapping solution and most importantly the timeframe limitation to be out of device manufacturing and distribution business. Nokia yearly revenue realization, of more than $500, from device centric patent payout from leading chip and other device manufacturers would bring higher free cash flow which can be reinvested into research to enhance patent portfolio in the next generation networks and devices segment. At the same time, the clause of 2 years of non-compete agreement indicate that Nokia might has trigged discussion to drop WM OS in favor of competing OS. Two years non- compete clause is one of the most generous offering I have ever heard in any M&A.

Another generous billions of $ loan to Nokia in order to help them payout loan taken to acquire Siemens 50% stake would enable Nokia to reduce their debt and inturn saves millions of $ in financing cost.

The 32000 employees, who will be transferred to Microsoft post deal closure, would help Nokia to mitigate any potential restructuring cost that was inevitable the way their device business was performing.

Post deal closure, Nokia would turn its Net cash position with all profitable business under its umbrella to cash in on good momentum generated by its network division. With the explosion of data centric growth in emerging countries and reservation of many countries around malware attached network equipment is going to offer Nokia immense opportunity to recapture business from its nearest competitors. It is also a possibility that Nokia may choose to re-enter into device market post 2015, once non-compete clause expires. It is also pretty clear that European Union is around 2 to 2.5 years away from achieving the old glory of differentiated growth and Nokia brand is very strong in that area. Its very high probability that Nokia may buyout Jolla brand which is developing Smartphone around MeeGo platform and run by ex Nokia employees. Many analysts predicted that it would be very difficult for Nokia to re-establish huge distribution and backend channel but one must remember that “Ones DNA never changes”. In my point of view, Nokia would be back by 2016 Holiday season

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