Clearly, at one times sales, with a stronger cash position and profitable, Nokia is in better financial shape and is still cheaper than the S&P 500 on a price/sales basis. Nokia was able to complete this transaction, has a good outlook, and added value to their stock because the company’s sum of parts was worth significantly more than the stock’s valuation.
Sum of part companies
Following Nokia’s deal, I do think that other companies with large revenue relative to their market capitalization should use Nokia’s move as a guide.
Such companies have a lot of flexibility, and can drastically change their outlook with just one large move. Alcatel Lucent SA (ADR) (NYSE:ALU) has rallied 16% behind the Nokia/Microsoft deal, as it too has large assets that can be sold to improve fundamentally.
Alcatel Lucent SA (ADR) (NYSE:ALU) soared from under $1 to over $1.60 after unveiling a plan to divest assets and monetize its patent portfolio in late 2012. Since then, the company has backed out of this plan , but with nearly $19 billion in revenue, a market cap of $6.8 billion, and operating margins of just 2%, Alcatel Lucent SA (ADR) (NYSE:ALU) is very similar to Nokia prior to its deal with Microsoft.
Alcatel Lucent SA (ADR) (NYSE:ALU) has certain segments of its business such as its switches/routers that is growing at 20% year-over-year, and others such as networking that are highly profitable. Yet, large fundamental overhangs keep the company from producing large profits and keep its growth at breakeven year-over-year. For companies such as Alcatel Lucent SA (ADR) (NYSE:ALU), Nokia is a good leader to follow, as making such moves will ultimately add significant shareholder value, allowing such companies to focus on their strong suits.
Final thoughts
Overall, I love the deal on behalf of Nokia, and I think time will be telling as it applies to Microsoft. Clearly, Microsoft felt they had to make a splash, and given their large cash position of more than $75 billion, this deal won’t necessarily hurt Microsoft if it fails.
To me, the more interesting story line is the value added in shares of Alcatel Lucent SA (ADR) (NYSE:ALU), suggesting that investors want a similar deal. Judging by the company’s shift plan, or back-out plan as I like to call it, I don’t think it happens. Nonetheless, Nokia’s deal is a great example of how a company with large assets relative to valuation can create shareholder value, and drastically change their outlook with just one deal.
Brian Nichols has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft.
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