New-look Nokia set to ring in the changes
Nokia is dead, long live Nokia! The Finnish group’s shareholders are likely to approve the sale of its once dominant mobile phones business to Microsoft for €5.4bn at an extraordinary general meeting in Helsinki on Tuesday. Some protests over the €19m pay-off to former chief executive Stephen Elop are also probable.
But even though it is selling a business representing half of its sales, Nokia’s share price has doubled since the deal’s announcement in early September. Investors may well be more optimistic but they also have big questions over the future direction of the new Nokia. Here are four of them. What will happen to the new core of Nokia? Nokia is still thrashing out details of its future business model. But its telecoms equipment business Nokia Solutions and Networks (NSN) is likely to be at the heart of the new group. Soon to be flush with Microsoft’s cash, Nokia is facing plenty of investor scrutiny over whether NSN could soon buy a competitor to compete better with its bigger Nordic rival, Ericsson. Rajeev Suri, NSN’s chief executive, tells the Financial Times he will not be pushed into any “silly acquisitions” nor make any transformational transactions in the short term. But he adds that deals will be something to consider in the long term given the strength of the new Nokia’s balance sheet, with about €7.5bn net cash. Most attention has been placed on a tie-up with Alcatel-Lucent, the French networks business, but Mr Suri declines to comment. Nokia has had no contact with the French group, according to one person with knowledge of the group. The idea of a big acquisition makes some investors and analysts nervous. “That is usually the position you don’t want them to take: the danger is they pay too much and there are big integration risks,” says Sami Sarkamies, analyst at Nordea, who sees Juniper Networks as a possible target as well. There is also concern over the fierce nature of competition in a telecoms equipment sector that has been hard hit by lower cost alternatives made in China. NSN’s sales fell by 26 per cent year on year in the third quarter as it focuses on profitability, as well as specific areas of the industry less open to commoditisation, in particular high-speed mobile data communications. “The top line trends are quite alarming,” says Mr Sarkamies. But profitability is relatively strong with an underlying operating margin of about 12 per cent forecast for the current quarter, which compares with a negative 1.6 per cent for mobile phones in the third quarter. Who will become chief executive? Mr Suri should be a strong contender to replace Mr Elop as chief executive (the job is being filled temporarily by Risto Siilasmaa, Nokia’s chairman). His success in turning around the long-time problem child of NSN has made him a favourite of many telecoms analysts for the job. Internally his main rival is likely to be Timo Ihamuotila, currently finance director and interim president.
The choice is about more than who leads Nokia. Several people inside and outside the company also believe it will be crucial in deciding the Finnish group’s future structure. Should Mr Suri get the nod, NSN would be clearly the core of the new group. If it is Mr Ihamuotila, analysts expect more of a holding company structure with NSN keeping its independent governance structure. An outsider as chief executive is also a possibility, but seen as less likely after Mr Elop, who came from Microsoft. The mood in Finland seems to be slowly shifting towards having a Finnish chief executive. “It’s totally out of the question that Rajeev would be CEO of Nokia. Timo is a possibility. What he has is the strategic acumen, what he lacks is charisma,” says a Finnish former Nokia executive. What about the other two divisions? It is not just about NSN. Investors are perhaps most excited about the potential for Nokia’s vast patent portfolio, which will live in a division called advanced technologies that will also house some research and development functions that could allow Nokia to make consumer products again in the future. Mr Sarkamies assigns it a value of €6bn – the same as for NSN. “Patents is the bit that really fascinates me,” says one big Nordic investor. It is different for the other division, it’s mapping business. People involved in the Microsoft deal say the only reason it was not sold to the US company was because of a disagreement over price. Mr Sarkamies says Nokia values it at a little more than €3bn in its books but has hinted that it might have to revise down that figure. How much cash back can shareholders expect? Another area that gets investors excited is estimating how much of its cash pile Nokia could return to them. Mr Sarkamies thinks a maximum of €4bn could be handed back via special dividends in the next few years. Third Point, the activist hedge fund run by Daniel Loeb, has said it has taken a stake in Nokia and wants the Finnish company to return cash through a dividend or buyback. At Nokia’s third-quarter results two weeks ago, Mr Ihamuotila said the company would provide clarity on its “strategy, operating structure and capital structure” around the closing of the Microsoft deal, which is expected in the first quarter. But impatience in some quarters is growing. Customers of NSN are starting to ask questions about the future of the group, with some complaining of a “typically Finnish” process that takes too long to take decisions.