By Bengt Nordström, CEO of Northstream
Nokia and Siemens surprised the industry this week as Nokia acquired Siemens’ entire 50 per cent stake in their joint venture (JV) – Nokia Siemens Networks (NSN) – for €1.7billion.
The transaction sparked speculation that Nokia was seeking to quit the handset space after a turbulent operating period. However, I believe that Nokia is still committed to becoming a leading handset player once again.Prior to Nokia’s move to take control of NSN, the general industry expectation had been that NSN would IPO, or be taken over by a private equity player. A constant has been that German technology giant Siemens wanted out of the JV it formed with Nokia in 2007; as it sought to re-focus market activity around its core businesses.
Siemens has now achieved this objective, but many have been left puzzled by its low valuation of NSN. The deal values NSN at €3.4 billion, which is dramatically lower than Ericsson’s sizeable valuation of €28.5 billion (albeit being half the size of the market leader). This estimation raises many questions as to what this agreement actually involves. Analysts who have assessed NSN are saying the sum of its parts is worth as much as €6-8 billion.
There is a clear, and substantial, gap in the outside valuation and the agreed price. To speculate, the €3.4 billion figure may be explained by Nokia controlling NSN IPRs. It could also potentially be down to reports that NSN is in the process of offloading its production facilities to third parties. More clarity is sure to be given on why Siemens accepted such a low valuation for NSN. I expect additional announcements to be put to the markets to reduce risk and boost financing for Nokia and NSN – in order to support the deal.
The huge shift in Nokia strategy that many are speculating about won’t materialise after the NSN deal. The company certainly won’t be moving away from the handset space. Handsets are in Nokia’s DNA. Since joining Nokia as CEO in 2010, Stephen Elop’s number one task has been to turn around the fortunes of Nokia’s handset business.
In early 2011, this culminated in Nokia dumping two of its in-house mobile operating systems. Instead, Nokia took a punt on Microsoft’s Windows Phone for its smartphone operating system of choice. Now this shift has not been a success for Nokia by some way. However, the tough times Nokia has endured in this market, and the NSN deal, will not see them exit. Nokia is still launching devices and is still more focused on becoming a major handset player once again.
A more likely, and straightforward, explanation of why Nokia moved for NSN is that the deal simply represents a good business investment. Mobile infrastructure is no stranger for Nokia. The Finnish giant controlled this entity a few years ago – so the risks and rewards are well understood. The acquisition was extremely affordable for Nokia and they have the option of a future IPO.
The new NSN has the perfect opening into the US market. There fierce Chinese rival vendors, Huawei and ZTE, can no longer sell in this market due to alleged ties to the Chinese military. As larger US operators tend to choose two vendors for infrastructure; NSN has the opportunity to take the lead, or support role to Ericsson, in many US equipment deals.
The entry of Japan’s Softbank to the US, via a potential €16.8 billion deal for a majority stake in Sprint Nextel, would also be a positive factor. Softbank has turned its back on Chinese vendors as well. Moreover, French-American competitor Alcatel-Lucent poses little opposition. The vendor is continually restructuring, cutting costs and unable to turn a profit. Its vulnerability is such that many speculate it may exit the market altogether.
NSN’s acquisition by Nokia may be an unforeseen move, but don’t expect any huge strategic U turns. This deal is more a result of Nokia being the buyer that could derive best value from NSN, and that Siemens really wanted to exit. NSN has the potential to deliver some positive growth for Nokia. Maybe even for its struggling handset business.