After watching Nokia lose nearly 20% of its market cap over the past week, rumors that Mr. Softy will ride to its rescue carry a distinct whiff of pie in the sky. On the other hand, the price that pundits are punting about -- $19 billion for Nokia's core mobile phone business -- doesn't sound like particularly good news for shareholders of this company, currently valued at $24.8 billion. Perhaps that's part of the reason why Nokia's stock kept falling yesterday.
Is there anything to the rumor in the first place? Let's take it point by point.
From Russia, with credibility
This all started about two weeks ago, when a Russian tech blogger leaked that Microsoft was in negotiations to buy Nokia later this year. Nokia immediately dashed cold water on the theory, dismissing the blogger's predictions as "less accurate with every passing moment."
Undeterred, said blogger announced this week that Nokia has, in fact, already agreed to a sale. Why didn't readers dismiss this new report outright? First, the blogger in question had already correctly predicted Nokia's decision to ditch its Symbian operating system in favor of Windows Phone 7. Second, this time Nokia initially refused to comment on the rumor, rather than denying it outright. (Nokia later rethought, and ended up calling the report "100 percent baseless.")
If you're afraid that Nokia's about to sell itself to Microsoft for a 23% discount, relax. Assuming this rumor's even remotely true, we'd only be talking about the divestiture of Nokia's handset business. While handsets are the bulk of the biz, they still account for only 69% of Nokia's 2010 revenue.
Price this revenue stream at $19 billion, and apply the same P/S ratio to the rest of "rump Nokia," and you get about a $27.5 billion valuation for the company as a whole. In other words, even if the rumor is true, Microsoft would be paying a small 11% premium to market cap for the part of Nokia it supposedly wants to own.
However, that doesn't tell the whole story. Nokia's telecom equipment unit is unprofitable, while its phones, however dwindling their market share, remain in the black. That's where Nokia's cash could come into play. The company has $10 billion in net cash, so if the $19 billion price was after considering cash, the premium could be far larger than 11%. Or, if cash was transferred to its telecom equipment unit, that would give the unit far more ability to maneuver, should Nokia get broken up.
Truth versus fiction: Which is stranger?
Even if the rumors are true, Nokia investors wouldn't be getting a raw deal. They'd lose a loser of a handset business, but hang onto telecom equipment manufacturer Nokia Siemens Networks. Combined with the network equipment business that Nokia bought from Motorola Solutions
But are the rumors true? Nokia's belated denial notwithstanding, it's hardly uncommon for companies to deny that they're talking until the ink on the contract is dry. And there are at least a few reasons to think a deal like this could happen.
For one thing, Microsoft can afford to make it happen. It's got more than $35 billion net cash on its balance sheet, after all -- much of it located abroad, hiding from the IRS. I can see some enterprising young dealmaker at Microsoft whispering in Steve Ballmer's ear: "Hey, if we buy a foreign handset maker like Nokia, we could leverage Windows Phone 7 and solve the problem of how to put our cash to work, all in one fell swoop."
For another, whatever you think of the wisdom of spending $19 billion on a handset maker that's having its head handed to it by rivals Google
That said, I certainly hope Microsoft doesn't buy Nokia's handset business, and I hope the rumors prove false. Right now, Microsoft is a high-margin maker of software products. It boasts better-than-40% operating margins on its business, versus the mere 5.1% operating margin Nokia eked out over the last 12 months. Paying $19 billion to acquire a less profitable business -- one surrounded by fierce, innovative, and more profitable rivals -- sounds like a textbook case of diworsification to me.
I don't put it past Microsoft to make a boneheaded blunder of this sort. I just hope it's smarter than that.
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