Light at the End of Nokia Corporation's Tunnel

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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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2014, at 5:57 PM, lee654 wrote:

    Nokia is the winner !

  • Report this Comment On April 09, 2014, at 7:24 PM, FishingPhil wrote:

    Satya Nadella, Microsoft's new CEO, said the deal with complete this month. He wouldn't make that statement unless he had assurances. The deal is likely being restructured slightly to take care of consideration for the India plant when this blows over.

    India's tax regulators are not going to stand in the way of a multi-billion dollar deal and a strategic direction for both of these companies.

    The deal will close in April, no question about it and we will see a bump in the price once it does complete just like we saw when China gave the thumbs up.

    There is no downside right now and I think the movement in price today indicates that quite nicely. Institutional money is going to be able to flow into Nokia now that the big question on China has been answered in favor of the deal and Nokia's patent portfolio.

    Also, Nokia may be holding back on several patent deals until they get the cash in hand. Their camera technology has no rival and with Nokia having no reason to hold propitiatory technology like that back due to not having a phone division any longer, I'd be surprised if parts of that aren't going to go on the auction block almost immediately after the deal is closed.

  • Report this Comment On April 10, 2014, at 4:01 AM, DamnSkippy wrote:

    @Tim Brugger,

    Nokia said the issues in India will not delay the deal.

    If you have been following Nokia you would know only feature phones are now being produced at the Chennai Plant. Reports of work being moved to Nokia China and the less then a year old Vietnam plant. Chennai Plant. Is now only producing 1-4 million phones down from 13 million, with up to 300 workers not having anything to do during shifts.

    Nokia has stated they will limit liabilities to its Indian assets. This is totally legal since Nokia India is a privately owned subsidiarity. So No Nokia isnt going to pay a billion+ to India Nokia India which produces phones will most likely close its doors since after the deal Nokia India Pvt will not be in the phone making business .

    Without the Chennai Plan.and, cheaper labor from the new Vietnam plant, should help Microsoft become profitable. They wont be over staffed and capable of producing more phones then they require..

    India is not only going after Nokia, there are over a dozen muti national corporations facing tax issues in India, Microsoft might be better off not setting up shop there.

  • Report this Comment On April 10, 2014, at 3:35 PM, elizalawrence wrote:

    I had no idea that the share price dropped 5%. It is so amazing the difference that such a small number can make. It is so nice to be able to see the hope in the future.

    Eliza Lawrence | http://gillinderglass.com/airfield-lighting/

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