September 4, 2013
As many market observers had expected for sometime, Nokia closed the chapter on what can only be described as a dramatic climb-down for what once was the world’s leading mobile player. Nokia agreed to sell its Devices & Services business to Microsoft for 5.4 billion euros. What does this mean for Nokia Solutions and Services (NSN), formerly Nokia Siemens Networks? I have several observations:
- I expect that more change for both Nokia and NSN lies ahead. Nobody can accuse Nokia of shying away from fundamental transformations: from pulp producer, to electronic component supplier, to mobile phone company, to now what resembles a holding company looking after a network infrastructure business (NSN), a cloud-based mapping service (HERE), and a patents and a licensing operation (Advanced Technologies). I see no synergies between these operations. Hence, a breakup of Nokia followed by an initial public offering of NSN could be one possibility. At the Mobile World Congress 2013, NSN presented itself in a manner what – to me – looked like dressing up for an IPO: a lean and mean provider of mobile broadband network solutions.
- NSN's sharp focus on mobile broadband (MBB) is beginning to pay off. NSN has been building an impressive momentum over the last several quarters in the form of a healthy operating margin since it announced its new strategy. This makes NSN look possibly the most attractive since its inception back in 2006. Its strict restructuring approach in combination with disposals and the exit from uneconomic deals as well as its cost controls help boost its free cash flow (FCF). This FCF in turn forms the basis for its MBB innovation drive. This is essential as the LTE growth will not last forever. Moreover, it remains to be seen whether carriers are prepared to pay for the premiums that NSN is planning to charge for top-quality products.
- It is crucial for NSN to further strengthen its services and solution offering. In its effort to streamline the business, NSN might have taken its eyes off the services and solutions ball somewhat. The likes of Ericsson and Huawei were given the opportunity to advance on NSN in the services space. In an effort to regain services momentum, NSN brought in new top management from Ericsson. And there are clear signs now that NSN’s innovation in the services and solutions space is regaining traction with offerings like liquid apps.
- The deal should help NSN to get access to cheaper funding. As part of the negotiations with Microsoft, Nokia agreed that it could issue up to 1.5 billion euros in convertible bonds that Microsoft would purchase. If the deal closes, Nokia would be in a position to net this financing opportunity against the deal proceeds with nominal value and accrued interest. This could leave Nokia with a net cash position of around 8 billion euros. This should appease not only investors, but also the rating agencies – and hence lower the interest that NSN would have to pay to raise funds.