For the last couple of years, investors of Nokia Corporation (ADR) (NYSE:NOK) have been on a roller coaster ride. Apple and Samsung have obliterated its market share but Nokia Corporation (ADR) (NYSE:NOK), to some extent, bounced back with its Lumia series. The real issue with Nokia Corporation (ADR) (NYSE:NOK) has always been the enormous downside risk. The recent purchase of NSN gives investors some downside buffer but this comes at the cost of much needed cash.
Nokia Siemens Network
Nokia Siemens Network is a multinational telecommunications vendor with presence in over 150 countries. With headquarters in Finland, it is a joint venture between Nokia Corporation (ADR) (NYSE:NOK) and Siemens AG (ADR) (NYSE:SI). NSN has become the third largest network equipment provider in the world with a market share of 15%. China’s Huawei Technology Co Ltd (SHE:002502) has a market share of 17%, and Ericsson (ADR) (NASDAQ:ERIC) leads the race with 35%.
The telecom industry is nearing maturity in North America and Europe. With network coverage nearing 100%, equipment vendor revenues are also on a decline. NSN has also been struggling due to this industry-wide slowdown. Decline in demand has forced the company to implement a global restructuring plan.
NSN has cut almost 17,000 jobs across the globe to reduce operational expenses. The aim of this cut was to save NSN around 1 billion euros in annual costs. The plan has been successful as NSN was finally able to turn a profit in the second quarter of 2012. The company reported full year earnings of 778 million euros in 2012.
The focus on LTE (Long Term Evolution) has also been a key factor behind the improved margins and profitability. In the absence of growth through network expansion, the upgrading of networks to 4G has become the most sought after contract in the mobile equipment vendor industry. The higher margins of this target market have contributed to improved profitability of the entire division.
Nokia Corporation (ADR) (NYSE:NOK) and Siemens AG (ADR) (NYSE:SI) have been trying to sell NSN for quite a while now. The companies were engaged in negotiations with private equity firms back in 2011, but talks failed due to lack of consensus on price. According to recent reports, Nokia Corporation (ADR) (NYSE:NOK) has agreed to buy Siemens AG (ADR) (NYSE:SI)’ half of NSN for $2.2 billion. The price was much lower than predictions of analysts. This deal has priced the JV at $4.4 billion, much lower than the $5 billion expected by the market. Shares of both Siemens and Nokia surged on the news.