Who Will Bail Nokia?

Yaniv is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nokia (NYSE: NOK), the Finnish mobile phone manufacturer and once the darling of the mobile phone business, is now a struggling company. However, Nokia has been back in the news lately with recent rumors of potential takeover by giant Microsoft (NASDAQ: MSFT).

The million dollar question for Nokia investors is whether or not the 150 year old company that has reinvented itself number of times in past will do it again, this time in an extremely competitive smartphone world.

Nokia lags behind

Only 10 years ago Nokia was the world’s largest smartphone maker with about 50% market share, way ahead of Apple’s (NASDAQ: AAPL) iPhone and Google's (NASDAQ: GOOG) Android smartphone operating systems when they were introduced. Nokia has lost about 90% of its market value since then and clearly lost the smartphone battle.

These days Nokia lags behind competitors such as Apple and Google, and under the most optimistic estimates Nokia has 2.5% of the global smartphone market. According to Business Insider, Google holds about 52% of the market with the world's most popular mobile operating system, Android. Apple has been behind Google this year, but holds 39% of the global market. Both companies still offer compelling growth potential, particularly in the global arena.

When it rains it pours for Nokia. In the first quarter of 2013, Nokia missed its sales expectations by 10 million units. Furthermore, following Nokia's announcement that it may take over Siemens, S&P downgraded Nokia's debt rating to junk, citing that the net cash of the phone maker will decline. In other words, the writing is on the wall--the company needs a desperate restructuring and there are two reasonable options on the table. The first is spinning off its phone division. The second option is to become a target buyout company by a giant company, perhaps Microsoft.  In essence, Microsoft has the opportunity to buy a veteran company with strong reputation and solid IP relatively cheap.

Taking over Siemens

Nokia has been engaged in a 50-50 joint venture with Siemens. Recently the company announced it is buying the remaining Siemens stake in NSN for $2.2 billion. After the deal is completed, Nokia Siemens Networks will become a wholly-owned subsidiary of Nokia. One should note that the Nokia Siemens Networks is a mobile infrastructure joint venture, and for Nokia to spend this kind of money on an infrastructure venture makes it a firm statement to saying goodbye to the smartphone arena.

The Nokia Siemens Network price tag was significantly lower than analysts were expecting. "We also believe Nokia is acquiring this asset at a very attractive price, well below what an initial public offering or trade sale could bring in the future," Liberum Capital analysts said in a research note.

Microsoft/Nokia "love story"

Nokia has been engaged in a deal with Microsoft to sell smartphones based exclusively on the Windows Operating system, as a result, Nokia brought to the world the successful Lumia series. Furthermore, last month Nokia introduced the Lumia 925, which runs on Microsoft’s Windows 8. Moreover, Nokia accounts for nearly 80% of all Windows Phone sales.

I truly believe the "love story" between Microsoft and Nokia makes total sense as Microsoft is seeking to bolster its wireless business. However, the critics of the venture claims both companies failed in the past--Nokia with its Symbian operating system and Microsoft with its Surface tablet.

Nokia and Microsoft already have a close partnership, with the Espoo, Finland-based company relying on the U.S. software maker for operating-system technology. The agreement between the companies is based on the platform that Microsoft will receive a running royalty from Nokia for the Windows Phones.

The foolish bottom line

I certainly think Nokia is a great buyout candidate. If Microsoft does indeed take over Nokia that will be a life saver for Nokia. On the other hand, Nokia is so far behind Android and Apple and it will take a heavy investment and perhaps years to play catch up. To conclude, if one of the two options materialize, spinning off the phone division or becoming a target company for a buyout, Nokia investors will finally cash out on a long, draining investment.

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Yaniv Hirsch has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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