Nokia Needs to Stop Throwing Good Money After Bad
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've read a few articles about how Nokia (NYSE: NOK) and Microsoft (NASDAQ: MSFT) seem to need each other. While fundamentally I believe this is true, Nokia needs to make a hard decision, and it needs to happen right now. Generally speaking, Nokia has three different businesses: they sell mobile phones, offer navigation solutions, and they have a partnership with Siemens AG (NYSE: SI) for networking. This last division is the issue that needs to be addressed.
Nokia's Problems, or Should I Say Problem?
If you don't know the problems that Nokia is having, you might live under a rock. The company has fallen from the most well known brand in mobile phones, to an afterthought. The company's last earnings report really spells out just how bad things have become. The company essentially saw huge declines in sales of pretty much everything. If you think I'm kidding, check out the report, and you'll be shocked at the number of times you see a year-over-year decline of 20% or more. What is really interesting to me is the financials at the end of the report.
In this section, investors get a clear depiction of what is causing the steep losses at Nokia. If you look at total revenues, the Nokia Siemens Networks division made up 40% of total sales for the quarter. What's even more important though, is this division used up 41.48% of expenses, and 75% of the company's operating loss! I've done the Euro to dollar conversion to save everyone time, and to be blunt, the company showed a significant loss due to Nokia Siemens Networks. If you strip out the losses from this one division, the remaining company would have shown $509 million in operating cash flow versus $162 million in capital expenditures. While this isn't great, it still means that Nokia would have been free cash flow positive. Given the company's negative free cash flow, it's somewhat amazing the balance sheet doesn't look worse.
What some might have missed among the credit downgrade of Nokia is, this company still shows $2.24 billion in cash and over $8 billion in “available for sale investments.” When you compare this to the company's $5.77 billion in total long-term liabilities, things don't look as dire as they would first seem. So if there is life left in Nokia, what should the company do?
Goodbye to Bad Business
Step one, get rid of the Nokia Siemens Networks venture. This division generated about $3.5 billion in sales in the quarter, but contributed to about $1.23 billion in losses. As I see it, there are essentially three options for the company to explore. First, sell the Nokia stake to Siemens. At last count, Siemens had over $11 billion in cash on their balance sheet. Since this is a 50-50 joint venture, offer it at a fire-sale price to Siemens. To be honest, if I'm Nokia management, I don't care what I get, because this division is killing the company. A second option is, to spin off this venture into a separate publicly traded company. While this would require Nokia to spend some money to get the new venture financed, it's a one time cost and from that point forward, the new company lives or dies on its own. This would effectively cut the cord between Nokia the parent, and the venture itself. The last option is to shut the venture down completely. While this sounds radical, think about the numbers for a minute. If someone came to you and said, I've got this great business that has $3.5 billion in sales, but it's losing $1.23 billion in the most recent quarter, most investors would laugh at the prospect of this being a viable enterprise. Sometimes it's cheaper to kill a dying business, than to throw good money after bad.
The Smaller Better Nokia
The leftover company is Nokia at its heart, which is a mobile phone manufacturer. The company faces some serious headwinds, while the Symbian platform winds down, and the Windows Phone platform ramps up. However, it seems this smaller, more focused Nokia would survive. The company received about $250 million from Microsoft in royalty payments in the most recent quarter from their agreement. Nokia is the only handset manufacturer to bet the farm on Microsoft's mobile OS. If Nokia were to drop the Nokia Siemens Networks division, I'm sure the company's market cap would drop by some amount. Even if the acquisition price were double the current market cap, I am wholeheartedly behind the idea that Microsoft needs to buy out Nokia.
Microsoft Needs to Make This Happen:
Nokia is unable to put its full weight behind the development of the Windows Phone lineup because of their financial issues. Microsoft's over $60 billion combined cash and investments would put these financial issues to rest. The fact that Microsoft developed the Surface tablet, and will be producing the hardware and software gives investors a glimpse of what the company can do. Imagine if Microsoft had access to Nokia's best and brightest engineers, what the company could produce. Nokia brings to the table high-end optics, mapping, and design. Microsoft brings its Office and Skype properties, and the clout of the upcoming Windows 8. The combined company could compete in computers, tablets, and handsets much more effectively. In the race to acquire patents, Microsoft could also pull off a huge deal by acquiring Nokia. According to a recent study, Nokia holds the most mobile patents for the years 1995 – 2012. Given how far Nokia has fallen, it seems a question of when they will be acquired. Microsoft needs to do themselves and Nokia shareholders a favor and just get this deal done now.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Microsoft and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
