Nokia (NOK), one of the biggest names in the smartphones industry, has been struggling for quite some time now in getting back its position as the leader in mobile phones. The company lost out to the rapid technological changes and the shift from traditional mobile phones to touchscreen smartphones. Apple (AAPL), along with BlackBerry (BBRY) and Samsung (SSNLF.PK), did most of the damage to Nokia's position since 2007. Since then, Nokia has never looked like the company that it used to be.
The Unexpected Deal
On the 2nd of September, it was announced that a deal between Microsoft (MSFT) and Nokia had been reached, stating that the latter has agreed to purchase Nokia's devices and services business for a price of approximately $7.17 billion. Not only does this mean that Microsoft will acquire Nokia's major business but this also means that a 10-year license to Nokia's patents will also be transferred to Microsoft along with 32,000 employees.
Valuation
Nokia's shares have already jumped over 35% on the news of this deal and the company is currently trading around $5.28. The reason why this was seen as a major boost was because the deal will help Nokia get rid of its major loss making division and despite being the heart and soul of the company, this would've been a last chance for the company to finally give up on smartphones.
Microsoft, on the other hand, is trading lower at around $31.44 as the company's shares were down over 5% after the news. The downside was a result of the shock move and the uncertainty on whether the company will be able to improve its market share in smartphones after handing out a major chunk of its cash flow.
What This Deal Means For Nokia
The deal, which is likely to be completed in Q1 2014, means that Nokia's "traditional" business, which accounts for nearly 50% of its revenues, will be sold to Microsoft, leaving Nokia with the NSN, Here Mapping Services and Advanced Technologies, which is a relatively new divisio! n.
Advanced Technologies
After the sale, Nokia is likely to increase its focus on the Advanced Technologies division, which will be the key to the company's upcoming business opportunities. This division focuses on connectivity, sensing, web/cloud technologies and material technologies. I would closely monitor the Nokia's future patents and expenditure on R&D, as this particular division is likely to impact Nokia's future opportunities.
Here Mapping and Location Services
Next comes the Here location services, which was a result of the acquisition of Navteq 6 years ago. Nokia has been building the Here division for quite some time now in order to offset its declining market share in the smartphones market. This particular division could become what Nokia's devices and services business is today. The thing here is to consider that the mapping division is not just a product which would compete against cross-platform app alternatives like Google Maps, but is a bigger picture which features an excellent long term growth opportunity.
Nokia has already taken its Here platform to the next level after it announced the Here Connected Driving service. The Here rebranding strategy of extending Nokia's location services has helped the company reach deals with companies like BMW, Mercedes and Volkswagen (VLKAF.PK) and Connected Driving is what takes this to the next level.
The new Connected Driving service will help Nokia grow its Mapping and Location division. There are 3 basic categories of Connected Driving including Here Auto, Here Auto Cloud and Here Auto Companion. Here Auto is basically the in-car navigation system featuring voice navigation and 2D & 3D satellite views. Aside from that, this also uses cached information, which makes it the first navigation system to work even without a connection. The Auto Cloud, which can also work without data connection, features updates such as road closures and real time traffic. Here Auto Companion is basically an app that lets! users sy! nc their car information with the companion app on their phones. The app can let users monitor fuel usage or tire pressure and will be available for both Windows phones and Android devices.
Nokia Solutions and Networks
Coming towards NSN, this is another huge business for the company, which is likely to continue growing in the near future. This particular business has been a recent cash cow for Nokia and has helped the company reduce its losses resulting from other business divisions. Previously known as the Nokia Siemens Network, buying out Siemens' (SI) stake from the division makes this a more independent unit that Nokia could focus on.
The business has around 600 customers in more than 150 countries since 2007. NSN was recently positioned by Gartner as one of the "leaders" in the Magic Quandrant for LTE Infrastructure in 2013. The position means that not only has the company showed incredible progress in LTE Networks, but also shows a significant improvement financially. The division has comprehensive LTE solutions including radio, EPC, transport and SON. NSN currently has a strong presence in Japan, South Korea and North America, benefiting from its presence in 3G as well as support from its LTE contracts. China is also a potential market as NSN will be one of the suppliers for the TD-LTE Launch.
What The Deal Means For Microsoft
Signing the deal means that Microsoft is making a last bet on the future of its Windows Phones. One of the key factors which led to the deal was that Microsoft waited a really long time for sales to grow and there is no doubt that Nokia struggled to compete with companies including Apple and Samsung with its Lumia smartphones. Stephen Elop, also admitted losing out to innovation after implying that Nokia needed to speed up phone development in order to become competitive again.
The key will be to drive volume and improve the market share of the WP8 platform. Steve Ballmer believes that the acquisition was what was needed after ! the long ! partnership with Nokia, which didn't turn out that good. The company will be able to make its smartphones independently and I believe that Microsoft will be able to speed up the innovation process on hardware and software. Apple and BlackBerry achieved major success in earlier years and the companies designed hardware along with software. Maybe this is what is needed for the Windows phones to pick up pace and I definitely think that brand name could play a major part in improving sales in the future.
The margins under emerging markets could play a major role in helping Microsoft improve the smartphones division. Margins on Lumia smartphones have been low for quite some time now but I believe that the Microsoft will be able to improve margins if it focuses in lower budget phone models. An increase in market share in emerging markets, including India and China, could help the company boost revenues for the division in the future
After news that Microsoft CEO Steve Ballmer will retire in under 12 months, there have been various rumors on who could replace the Ballmer and turn things around at the company. After signing the agreement, it is likely that Stephen Elop could be a potential candidate in becoming Microsoft's next CEO. After leaving Microsoft in 2010 to become Nokia's CEO, Elop will be back to Microsoft as executive VP of the devices and services division. According to a British Bookmaker, Elop was the favorite to replace Ballmer with 5/1 odds and after the acquisition of Nokia, the odds are likely to improve.
Conclusion
Even though this specific division has been the heart and soul at Nokia, I believe that selling it to Microsoft would be beneficial for both the companies. By no means does this mean an end for Nokia and the company has better opportunities to improve its business in the future. The smartphones business was the segment which was holding Nokia back and I expect the company to show improvements in profitability based on its other relatively strong business di! visions.
For Microsoft, there is a lot of work ahead. Speeding up product development and improving market share after entering into hardware would be quite difficult but could help the company turn things around in the future. In simple terms, whatever happens to the future of Windows Phones will be at the hands of Microsoft
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. (More...)
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