Light at the End of Nokia Corporation's Tunnel

The two tech giants got some good news from China regarding their pending mobile deal, but it's not celebration time yet.

Apr 9, 2014 at 4:21PM

Yesterday's 5% pop in share price was great for Nokia (NYSE:NOK) fans, and not surprising considering it came after Chinese regulatory bodies gave the nod to the planned sale of Nokia's devices and services unit to Microsoft (NASDAQ:MSFT). Approval from Chinese authorities for the $7.2 billion transaction is one less barrier to getting the deal done, and worthy of the bullish sentiment.

Of course, it's been seven months since the deal between the two longtime partners was first announced, so a simple, "it's about time," might also be warranted. But it's water under the bridge now, and with the inroads Nokia has already made in the fast-growing China mobile market, gaining the "OK" in China is a big deal. The (potential) problem is, China wasn't the last hurdle facing Nokia and Microsoft.

The good news
The stamp of approval from China is the latest in a series of reviews by regulatory agencies around the world. In addition to China, the Nokia-Microsoft deal has gained approval from, "the European Commission, the U.S. Department of Justice and numerous other jurisdictions." With Nokia's emphasis on emerging markets like China, the review process was always going to take some time.

Importantly, Chinese authorities also agreed with the other global regulatory agencies that Nokia's all-important "patent licensing practices" can continue uninterrupted. It's no secret that Nokia's patent portfolio is one of its greatest assets, and a critical part of the Microsoft transaction. Nokia also reiterated that it expects to get the deal done by the end of this month.

Is this going to be a problem?
When Nokia announced the closing date of its unit sale to Microsoft would be delayed until this month -- the two had originally expected the transaction to close by the end of Q1 -- it attributed the setback to waiting on, "approvals from certain antitrust authorities in Asia." With China now in the fold, that would seem to answer that concern.

But Nokia wasn't done. There was a caveat to its announcement two weeks ago in which it said that, "ongoing tax proceedings in India have no bearing on the timing of the closing or the material deal terms of the anticipated transaction between Nokia and Microsoft." It seemed curious that Nokia would mention its tax problems in India in a press release announcing a delay in closing, but that was nearly two-and-a-half weeks ago; so no big deal, right?

As we inch closer to mid-April with no resolution of its India tax "situation" in sight, Nokia's caveat is sounding more and more ominous.

It's getting worse, not better
There's an estimated $400 million to $570 million Nokia owes in back taxes in dispute. The claims against Nokia India, included that it didn't file the appropriate paperwork proving it exported phones made at its Chennai plant, and made payments to its parent company for services rendered, effectively avoiding India's sales tax. Nokia's response? The whole ordeal is "absurd."

Unfortunately, the India tax authorities recently ordered a "special audit" of Nokia's India operations. That's not necessarily bad, assuming Nokia has the paperwork it claims it does that will settle this whole mess. What is disconcerting is the accounting firm was asked to finish its audit "within 120 days." What's wrong with that? The firm conducting the audit was given the task less than two weeks ago.

The timing of the tax audit doesn't bode well with closing the devices and services transaction in the next three weeks. Granted, only Nokia's and Microsoft's attorneys, along with India tax authorities, really know where the process stands. But unless there's a settlement soon, Nokia and Microsoft have some serious decisions to make.

Final Foolish thoughts
Nokia's devices and services unit is a key component of new Microsoft CEO Satya Nadella's promise to focus on mobile (in addition to cloud technologies and services). Not only is India a key market for Nokia's devices, Chennai is one of its primary manufacturing facilities. Does a deal go through if Nokia's India problems aren't settled? If it does, it won't be the one investors are betting on.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of 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.

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