Nokia's (NYSE:NOK) stock was recently jolted by rumors of a hostile takeover. The online paper TMT Finance claimed that the Finnish network equipment maker was fending off a bid from an unnamed suitor, but Nokia remained silent on the matter.

Nokia's stock tumbled about 40% over the past 12 months as it struggled against rivals like Ericsson (NASDAQ:ERIC), ZTE (OTC:ZTCOY), and Huawei in the 5G market. It also recently announced layoffs across Finland, and replaced its longtime CEO Rajeev Suri with former Fortum CEO Pekka Lundmark.

An illustration of networking connections across the globe.

Image source: Getty Images.

Those developments all indicate that Nokia, the second-largest telecom equipment maker after Huawei, is in a vulnerable position. Investors should always take buyout rumors with a grain of salt, but they should be familiar with its most likely suitors. Here are four companies that could make a bid for Nokia.

Ericsson

Nokia controlled 15.9% of the global telecommunications equipment market last year, according to Dell'Oro Group, placing it between Huawei's 27.8% share and Ericsson's 13.6% share. Merging Sweden-based Ericsson with Nokia would create a new European telecom equipment behemoth that could overtake Huawei.

Nokia has an enterprise value of $19 billion. Ericsson, which has an EV of $28 billion, ended last quarter with just $3.4 billion in cash -- so it would likely need to execute a stock-based merger instead of a full takeover.

The new company might prevent Huawei, which is being closely scrutinized for its ties with the Chinese government, from expanding its wireless infrastructure beyond China. The combined scale of Nokia and Ericsson would also allow it to cut costs and sell cheaper equipment, which would nullify one of the key strengths of Chinese manufacturers like Huawei and ZTE.

Cisco

Back in February, U.S. Attorney General William Barr declared the American government should buy controlling stakes in Nokia and Ericsson to "blunt" Huawei's "drive to domination." But with the COVID-19 pandemic driving the U.S. government to prioritize stimulus and relief packages, it seems increasingly unlikely the U.S. will buy multi-billion dollar stakes in both European companies.

An illustration of network connections across a city.

Image source: Getty Images.

However, there's still a strong chance that an American tech giant -- Cisco (NASDAQ:CSCO) -- can buy Nokia to tilt the balance of power in the telecom and networking market back toward the U.S. again.

Cisco is the world's largest manufacturer of routers and switches, according to IDC, and it ranks fifth in the global telecom equipment market, according to Dell'Oro. Cisco held $27 billion in cash and equivalents last quarter, which indicates it could buy Nokia outright and integrate the company into its broader networking business.

Bundling together both companies' telecom equipment, networking hardware, and software into cost-efficient packages could cause major headaches for Huawei. It would also significantly widen Cisco's moat against networking rivals like Arista Networks and Juniper Networks.

Huawei and ZTE

China could also be pushing Huawei and ZTE to make a bid for Nokia, which would significantly widen the country's lead in the telecom equipment market.

The Chinese government already fired a warning shot against Nokia earlier this year, when state-backed China Mobile (NYSE:CHL), the country's largest wireless carrier, dropped Nokia from its second round of 5G upgrade contracts in favor of Huawei and ZTE. China Mobile didn't explain the move, but it was clearly a retaliation against French telco Orange's decision to bar Huawei from its 5G contracts.

That blow exacerbated the pain for Nokia's Chinese business, which already posted a 15% revenue decline last year amid slower-than-expected 5G deployments. Therefore, the Chinese government might be encouraging Huawei and ZTE to dangle a deal in front of Nokia to bring it back to China -- which would mark a major victory against the U.S. and Europe in the telecom market.

However, a Chinese takeover of Nokia would likely be barred outright by European regulators -- so it's a far more fanciful idea than a takeover by Ericsson or Cisco.

The key takeaways

A takeover of Nokia would be bold, but it wouldn't be surprising. The telecom equipment market has been consolidated over the past few decades, and Nokia is an attractive option for the market leaders in its weakened state. Investors shouldn't assume a takeover will occur, but they should monitor the situation -- which could send shockwaves through the networking and telecom markets.