It's only been just over a year since Microsoft (NASDAQ:MSFT) closed its acquisition of Nokia's (NYSE:NOK) handset business, yet here we are, and Nokia might be experiencing a little bit of seller's remorse. That's right -- Nokia wants to get back into the phone business.
Back in the saddle
In an interview with Germany's Manager Magazin (via Reuters), Nokia CEO Rajeev Suri detailed the company's plans. We're not talking about Nokia completely going back to the way things were. To be clear, Nokia doesn't plan on manufacturing any future phones directly, as the capital intensity of manufacturing operations was a large part of why Nokia's handset business was such a financial drag in the first place. Only in the final years did Nokia begin outsourcing to contract manufacturers, which is the typical practice in the industry.
Instead, Nokia will partner with other companies and license its designs:
We will look for suitable partners. Microsoft makes mobile phones. We would simply design them and then make the brand name available to license.
In essence, it sounds like Nokia wants to get into making reference designs, which means it will be competing with companies like Qualcomm. Nokia is contractually prohibited from reentering the handset market until 2016, but investors can expect Nokia to jump right back in once the light turns green.
Is this a smart move?
The inevitable question is: Why would Nokia sell its handset business just to start over from scratch? Selling the handset business was a great decision in the first place. Shares skyrocketed when the deal was announced in September 2013, since the proceeds would beef up Nokia's balance sheet and profitability would improve. The company even reinstated a dividend after suspending the payout in 2013. Finally, Nokia's board just approved a share repurchase program for up to 365 million shares.
Nokia is also now trying to merge with networking equipment rival Alcatel-Lucent in a $16.6 billion deal that would have obvious synergies and represent a greater challenge to market leader Ericsson. That deal is still making its way through the regulatory rounds and is expected to close in mid-2016. The U.S. Department of Justice just gave its blessing, but there are still other regulatory bodies around the world that need to sign off.
These are all signs that Nokia's turnaround and transformation into a networking equipment pure-play are proceeding swimmingly. So why does the company want to distract itself with designing handsets again?
In a strange coincidence, Stephen Elop may now be back on the job market. Microsoft CEO Satya Nadella has just announced a major executive reorganization, and Elop is leaving Microsoft... again. Will Nokia take him back to head up a fledgling devices segment?
Jumping back into handsets seems like a needless distraction. It's true that this slimmer reincarnation could potentially generate high-margin licensing revenue, but only if OEMs get on board to make the devices. Perhaps Suri wants to capitalize on Nokia's remaining brand strength in the handset market, especially since Microsoft officially killed off the Nokia brand last year in favor of keeping Lumia.
So long as Nokia doesn't invest too heavily in building a phone reference design business, then the risks wouldn't be too great. Nokia has recovered in recent years, but that doesn't mean it should be taking big risks anytime soon.
Evan Niu, CFA, has no position in any stocks mentioned. The Motley Fool recommends Qualcomm. The Motley Fool owns shares of Qualcomm. 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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