Those who have read my previous blog on Finnish smartphone maker Nokia Corporation (ADR) (NYSE:NOK)’s recent fortunes would recall how I had spoken of the advantages of the company’s acquisition of the Nokia Siemens Networks wireless equipment venture. And it seems that management has indeed found this to be a profitable proposition, something that I’m sure would put them in good stead in their present hour of crisis.
But more on that later as we take a quick look at the specifics of the deal and why it involves some amount of risk for Nokia Corporation (ADR) (NYSE:NOK) as well. Essentially a joint venture between Nokia and Siemens AG of Germany that has had its own fair share of ups and downs, Nokia Siemens Networks has now been acquired by the handset maker in a deal worth 1.7 billion euros ($ 2.2 billion), a deal that is expected to be concluded by the company’s current third quarter. And with Nokia Corporation (ADR) (NYSE:NOK) already said to be at an advantage by purchasing the JV at a less-than-estimated market price, the sweetly-timed deal might actually work in its favor in more ways than one.
A risky proposition, perhaps
And it’s precisely these long-term advantages that will help Nokia in reassuring some edgy investors who might feel that the company has taken a risk by shelling out a considerable portion of its already dwindling cash pile. After all, even if Nokia Corporation (ADR) (NYSE:NOK) had finalized the deal in the second quarter, it would have meant a considerable deduction of 1.7 billion euros out of the company’s current net cash pile of around 3.7 billion euros (as estimated towards the end of June). Potential investors would need some jolly good reasons to justify an expenditure of this scale. Allow me to present a few of them on Nokia Corporation (ADR) (NYSE:NOK)’s behalf.
But a profitable one as well
After years of running at a loss, Nokia Siemens Networks, or NSN (as I would prefer to call it till a new brand name is officially announced), finally attained operating profitability due mainly to a massive round of cost-cutting that included mass employee layoffs. And the venture’s future plans include outsourcing of production, along with the sale of manufacturing factories based at India, China and Finland – things that are bound to add to its profitability even further. The scenario has obviously worked to the advantage of Nokia to a large extent, as the latter slipped down the ladder rapidly in the global smartphone race. In fact, NSN has become a very important part of Nokia Corporation (ADR) (NYSE:NOK)’s overall business, accounting for as much as 46% of the latter’s revenues in the previous year.
The LTE factor
But that’s not the sole reason for why Nokia’s management may have opted for the buyout of the venture. NSN is now the second biggest provider of wireless data networks that are based on the next generation Long Term Evolution (LTE) technology, a major focus area for wireless providers in crucial smartphone-dominated regions such as the US. As handset makers gear up to release more LTE-enabled phones, supported by wireless providers that are pouring in more money into building compatible networks, NSN automatically becomes a prime and coveted takeover target.
And it’s not just wireless providers in developed regions that are in the fray for providing LTE-enabled services to customers. Others such as China Mobile that have dominant customer bases in emerging nations are also investing heavily in building fourth generation LTE network-based infrastructure. All this more than justifies the cash-related risks incurred by Nokia while finalizing the deal.