Quick Thoughts on Nokia as Takeover Target (Samsung, Facebook, Microsoft and others)

So its now again time to speculate. First when CEO Stephen Elop issued his Burning Platforms memo and announced the Microsoft Partnership (the Elop Effect) that collapsed Nokia sales and started the relentless dive of Nokia share price, there was so much cash in Nokia's bank balance and the company was still so big and valuable, it didn't make much sense to try to buy it.

Last summer when Nokia issued its profit warning and the share price fell dramatically more, the first rumors emerged about buyouts. This was due in large part because Nokia's share price had fallen below the level where Nokia's assets were worth more individually, than the total value of outstanding shares. This is a critical level to investment bankers, where the share price is 'too low' and will attract hostile buyout bids - often with the intention of buying the corporation for its individual parts, intending to split it apart and sell the parts.

There were buyers circling in the waters. We heard of rumors of Samsung, Sony, Google sniffing around, as well as Microsoft.  And last summer there was also a cheaper giant phone maker as a target, Motorola, with a big patents portfolio. We then learned that Google did buy, not Nokia but Motorola. Samsung did buy, not Nokia, they bought Sony's flat screen production. Sony did buy, not Nokia, but bought out Ericsson in the SonyEricsson partnership and now owns the handset unit. And we learned that Microsoft had entertained the thoughts of buying RIM together with Nokia but the two decided against it.

Now again we have a similar situation. The Nokia price has fallen further. After the latest profit warning it kept falling and was nearing the 2 Euro level (was below 2.10 Euros several time this year). In the market there is another target as well. This time it is RIM, which has already hired investment bankers to see if they can be sold or find an investor or whatever. And Nokia has had investment bankers working with them for a long while trying to sell NokiaSiemens Networks ever since Elop came to town, and for example recently looking for buyers for the Vertu luxury phones unit.

Who would want Nokia and why. This blog is a brief discussion about that. Some of the names we now hear are Facebook, Samsung and Microsoft. But if you remember when Palm was acquired, the interest from Hewlett-Packard seemed to come out of the blue and very suddenly and rapidly, and they snatched the smartphone maker. So it may be that there is another interested suitor who is under the horizon but wanting to move in. And Nokia is now very cheap, many companies can afford to buy Nokia easily.

TARGET

So lets first take quick look at Nokia as the target. You might not know exactly what is all in play. Nokia is nowhere near as damaged goods as its recent share price valuation would suggest. First, Nokia has four major business units, three big ones, one small one. The small unit is Navteq the mapping unit. That is not what people want, it is not a major revenue source nor profit engine but there might be interested parties especially in the USA who believe strongly in navigation, location-based services and maps, who might value this part. 

Then there is NSN, the NokiaSiemens Networking unit. That is the biggest employer of Nokia employees and generates roughly a third of Nokia revenues, but is rarely profitable. It was slightly profitable before Nokia's Networking and Siemens's loss-making Networking units were merged. Then they struggled for a while in that merger, until it became borderline profitable, then Motorola sold its loss-making networking unit - which NSN bought and again this unit became unprofitable. Since then it has I think been again borderline profitable a couple of times but is mostly unprofitable. NSN is by sales volume about the third biggest telecoms networking provider behind Sweden's Ericsson and China's Huawei, ahead of France's Alcatel-Lucent and China's ZTE.

Then Nokia is both smartphones and dumbphones ('featurephones'). The smartphone unit was only two years ago utterly dominating the global smartphone market, the bestselling smartphone brand on five of the six inhabited continents, only suffering in the North American market where six domestic smartphone manufacturers on five domestic smartphone OS platforms were obviously holding the majority of that market. Nokia's smartphone unit ran Symbian - an OS that many have called outdated, which yet is able to produce such superphones as the global award-winning 808 PureView. Symbian's app store (formerly called Ovi) is the world's third biggest store by downloads. Symbian apps are supported in the most languages, have most carrier-billing arrangements and Symbian/Ovi is the bestselling app store in many of the biggest mobile telecoms markets like China, India etc. Nokia has a second OS it has developed in-house called MeeGo (developed from Nokia's Maemo). Nokia sells the N9 which runs MeeGo, a highly award-winning and highly praised superphone. Nokia manufactures a second MeeGo phone, the N950 which Nokia refuses to sell. There are other manufacturers of the MeeGo OS on laptops and tablets, in Asia, such as Fujitsu of Japan. Nokia has a developer environment called Qt which allows app developers to develop to Nokia's Symbian and MeeGo smartphones, as well as Android and Blackberry smartphones, and it is being developed to also support Nokia's featurephones running on the S40 operating system.

The Nokia smartphone strategy was comprehensively mismanaged by CEO Stephen Elop, who famously issued the Burning Platforms memo - the costliest management memo of all time - that Elop now admits did hurt Nokia Symbian smartphone sales. The effect was similar to the Ratner Effect. He also selected the Microsoft Windows Phone operating system for Nokia smartphones - which now is clearly seen as a failure and unable to even support basic features that Nokia owners expect from their featurephones or older Symbian phones. Elop himself has said just a few weeks ago, that Nokia Lumia sales have been "Below expectations." This after he admitted he ruined Symbian sales with his memo. His announcement timing - not the decision but the timing of the announcement - caused an Osborne Effect to Nokia smartphones. I have called these two colossal strategic mistakes the Elop Effect which have wiped out more than 10 Billion dollars of smartphone sales out of Nokia's business in just one year. Elop has consistently illustrated incompetence in managing the disaster that is Nokia smartphones - including badmouthing the N9 and MeeGo operating system to refusing to sell the N9 in Nokia's best markets, to refusing to sell the N950 anywhere. This while the N9 is the only Nokia phone ever to receive regularly reviews calling it better than the iPhone and that every tester who has tried both, says in public that the N9 is better than any phone in the Lumia series. I have shown that Stephen Elop took Nokia's 33% market share it owned in smarpthones in 2010 when he took charge, and replaces it with 5% that Nokia will have at the end of this year.

The Nokia smartphone unit is not terminally ill. It has been grossly mismanaged by Stephen Elop, who has desperately pursued a dead-end strategy of Windows Phone. Now Elop himself admits (admitted to the Nokia shareholders meeting in May) that many of Nokia regular long-standing customers - the carrier community - actually have refused to buy any Lumia at all. China Mobile the world's biggest mobile operator - in the world's biggest market, China - refused Lumia and forced Nokia to produce a new Symbian based smartphone of roughly similar touch screen form factor instead (the 801T). European carriers too the early Microsoft money and then complained that Lumia is not fit to sell. Latest channel checks by MKM just a few days ago found that after the early market launch buzz, the retail channel is cooling off on Lumia. Their words: Lumia have "Fallen out of favor". And we know why. Elop admitted to the Nokia shareholders that all Windows Phone handsets are globally disliked by the carriers - Elop's words add "of course" to illustrate how well this is known inside the industry - and that all Windows Phone providers suffer. His reason why? Because Microsoft bought Skype. Carriers hate Skype because it kills operator revenues as Elop told the shareholders. Skype not only kills voice call revenues but also videocall revenues and text messaging revenues. Skype is far more dangerous than any other 'OTT provider' like Whatsapp or iMessage or Facebook even, to the operators/carriers.

I am not suggesting Nokia's smartphone unit is healthy and being strangled by its CEO - although the CEO himself admits to having caused unnecessary damage to the Symbian sales. Nokia has since been firing a lot of competent staff and eliminated units and businesses around the smartphones and software business. But it is clear to anyone who examines Nokia with a fair mind, that it is being totally mismanaged in its smartphone unit. The Windows Phone world is a dead end now for Nokia - look at all the partners in the Windows world who have quit this ecosystem already like Motorola and Dell and LG and Sony. And look at how strongly HTC and Samsung the two traditionally biggest Windows smartphone providers are shifting away from Windows Phone now. The efforts by Nokia to force its loyal custoemrs to shift to the highly hated Windows Phone system - causes the biggest return rates that Nokia has ever seen on any phones. This is because of the so-called 101 failures of the Windows Phone OS to explicitly Nokia smartphone owners (note, some of the items in that original list are disputed, but by far the most are relevant)

So Nokia's smartphone unit is sick yes. It is suffering yes. It was once a profit-generating powerhouse for Nokia but immediately after the Elop Effect it started to generate increasing losses to Nokia. It is not because suddenly February of last year Nokia's rivals launched superphones like the iPhone 7 with time travel of Samsung Galaxy S5 with teleportation. Nor is it because Nokia had some production defect like exploding batteries or antennagate. No. The unprecedented global collapse of world-record level was because of mismanagement by Elop. Anyone with a normal business degree and sense can recover the smartphone unit back to reasonable success and profits, by abandoning the silly Windows Phone path. I am not saying Nokia go back to Symbian, obvously. But does the solution mean shifting to Android or resurrecting MeeGo, would depend on who buys Nokia. But they'd immediately fire Elop obviously for gross negligence and mismanagement. The Smartphone unit is in deep trouble, but is not terminally ill. It can be recovered to profits in less than a year by abandoning the Windows Phone path.

To prove my point? After Windows Phone Lumia series launched, Nokia has exchanged 6.9 million loyal Nokia smartphone owners using Symbian for 2 million new owners of Lumia phones - the exchange rate is not 1 to 1. Its not even 2 to 1. Nokia loses 2.5 loyal existing smartphone customers for every 1 it manages to convince to take the Lumia - the exchange rate is yes. 3.5 to 1. That is certain road to death and tells us the Lumia Windows Phone path is certain death to Nokia. If Nokia pursued this path to the end of all Symbian customers, today's 11.9 million smartphone customers per quarter shrinks to 4.8 million by Q4 of 2012. Nokia's market share that is 8% today, would fall to 2% by year-end. Anyone with a basic high school education sees this is certain ruin and any new owner of Nokia will immediately terminate the suicidal Windows Phone path. Can Nokia recover from 8% market share now to 10% or 12% or even 15% would depend on how well the smartphone unit is managed and partly who buys Nokia, but if the mismanagement is ended, this unit will perform better.

And if someone buys Nokia who wants to sell it in parts, note Nokia has three very distinct smartphone units. The Lumia Windows Phone unit is moderately successful in North America and desperately needed by Microsoft. So sell that unit to Microsoft. The Symbian unit can do good phones, has mass market appeal, is desired by Europeans, Chinese etc and if Nokia released new phones on it like the 808 PureView, it can live by itself (but should soon migrate to Android or MeeGo). And there is the premium smartphones unit MeeGo which could fight against top-end smarpthones and be instantly profitable as a stand-alone unit.

Lastly there is the dumbphones unit (featurephones). Nokia's main revenue and profit generator now that the smartphones unit is so unprofitable, is the dumbphones unit. They have just released a set of new touch screen featurephones that work like low-cost smartphones. They do full internet, they have a big apps store, including Angry Birds of course. These include the Asha series of low cost phones designed for the Emerging World markets and many of Nokia's dumbphones have dual SIM slots etc that are highly desired features in this market segment. Samsung has just passed Nokia as the biggest overall handset maker when we also include smartphones, but in dumbphones Nokia is still the biggest and has a quarter of this market. To be clear, the Nokia dumbphone unit is the biggest seller of dumbphones in Asia where half of the planet's phones are sold, plus in Africa (bigger than Americas combined) and in Latin America (more phones sold than North America). Nokia is second to only Samsung in Europe. So this featurephone unit has a big share of the global handset market and is highly successful in most parts where the market is still growing strongly from Russia to Brazil. This unit faces pressure from the top end by low-cost smartphones like Samsung's bada series and low-cost Androids from China. And the unit faces pressure from the low end by many local low-cost handset providers like Spice in India and Mi-Fone in Africa. But this unit is very competitive and dominates its main markets. And there is an internal project to migrate the dumbphones unit to a Linux based smartphone platform home-grown by Nokia and Linux based (and thus a sister to Android and MeeGo) called Meltemi. That is not yet ready for phones to launch but first phones are expected in about a year, so this unit is not a dinosaur either, it has life in it.

That is what we are looking at. Nokia also owns a big patents portfolio. It was once the biggest in the industry, but Elop has been selling parts of it to various patent trolls where usually Nokia retains a contractual right to use the patents for its own uses forever (the patent troll cannot attack Nokia) but sells the rights otherwise to the troll who then attacks rivals like Apple, Google, etc. Elop has also extended bizarrely Nokia's proprietary patent protection to Microsoft who did not invent those patents, in these deals with the patent trolls. Thousands of patent families have been already sold to such third party companies. We don't know how many patents Nokia still holds. But to show how powerful this was, Nokia was able to negotiate that Apple pays Nokia for every iPhone sold and Nokia pays nothing to Apple. Meanwhile Apple has been suing rivals like Samsung and HTC quite successfully blocking their sales in some regions etc. Nokia's patent portfolio was very strong once, and even now, if someone like Samsung were to acquire Nokia, it should then gain at least the patent protection Nokia had - if not always the ability to actually sue rivals as those rights have now been often sold by Elop to the patent trolls.

Other assets. Nokia has cash in the bank. Nokia has plenty of huge highly modern and efficient factories often in the markets where the big growth is happening like China, India, Brazil etc. Nokia has a reputation for the best sourcing and components partnerships (they have suffered recently under Elop's mismanagement) and used to have the best carrier relationships by far of any handset maker (which have been strongly poisoned by Elop recently. He admits to the Nokia shareholders that there are problems in the carrier channel - or to use Elop's words in the Q1 results - "the actual sales results have been mixed" ). The Nokia brand used to be one of the most valuable brands on the planet (was in the top 10). While the Nokia brand has been severely damaged since the Elop Effect, still in especially the Emerging World markets, Nokia still is seen as synonymous with mobile phone and has a sterling reputation. The Nokia brand could be sold separately from some business, such as if Microsoft bought Nokia, and kept the Lumia unit, Microsoft would not need 'Nokia' as the brand, it would keep Microsoft Lumia and could sell Nokia the brand to some growing company like say ZTE or G'Five or some other Chinese brand much how Lenovo bought the IBM PC business.

NOW SUITORS - WHY SAMSUNG?

Ok. Samsung knows Nokia the best. Samsung now knows Nokia better than Elop's management team. Samsung has had a strategy in all of its businesses, to study the market leader and mimick its activities meticulously, never question the logic but copy every action - and do it faster. This way the global leader spends lots of resources studying the market, and experimenting with dead-end projects, but the fast follower makes constant gains just copying the activities. That is the way Samsung has taken over all other industries where it has become global number 1. And now Samsung has just become both the worlds' biggest smartphone maker, and overall biggest handset maker. Those were held by Nokia for almost all of the past 14 years (until, obviously, the Elop Effect). So. Samsung KNOWS. They know better than I do and readers on this blog. They know better in Seoul than Nokia's Board knows, what Nokia has done right and wrong in the past few years. They have seen every single strategic mis-step and tactical mistake that Nokia management did even before Elop, under Kallasvuo, and especially in the past year or so. They know.

Samsung top management know exactly every point I talk about in this blog. Nothing new for them. They know also, that Nokia is not broken, Nokia has been mismanaged. Samsung doesn't need or want the NSN unit but could take it and make a business out of it - Sammy is big enough and there is a lot of engineering talent there and big global customers. But most of all, Samsung could immediately take over the total Nokia handset operation, and almost overnight, turn it back into growth, revenues, profits and strong customer loyalty. Why? Because Samsung have seen, and meticulously catalogued all Nokia mistakes - to the point, that Samsung has regularly capitalized on every Elop mistake - like abandoning MeeGo - it was Samsung who jumped in with Intel - and then cleverly renamed the project to Tizen, so its now Samsung's and Intel's thing, no longer the old Nokia MeeGo thing. And did you notice Nokia lost 43 exclusive Nokia handset dealership stores in Russia. Samsung took them over. And the distributor for Nokia exclusively for Africa? Is now Samsung exclusively. That kind of moves. Samsung has studied Nokia in deep detail and can instantly chronicle every mistake (and not undo some things that Nokia has done well, like dual SIM phones for example - something Samsung did first and Nokia copied by the way).

This is what Sammy would do. They would fire Elop immediately and his Microsoft Mafia. Samsung would bring in their top handset sales talent from Seoul to take over Espoo. Then they would categorically undo essentially every decision that Elop made that can be undone. As Nokia has been firing tons of staff, Samsung would gain a relatively lean organization but huge factory capacity - to help build Galaxies - and the biggest distributor channel and the strongest handset brand of Africa, Asia and Latin America. Meanwhile who is the strongest handset brand of North America and Europe? Samsung! Even in Japan, a market where almost no Western brands succeed (and Nokia tried and failed) - Samsung is a strong brand. So Samsung would create Nokia as its lower cost brand like in cars, like Volkswagen Group has Audi as a luxury premium brand - like Samsung would be - and VW is the mass market brand as Nokia would become. In American terms, think GM with Cadillac (Samsung) and Chevrolet (Nokia). In Japanese terms, Toyota (Nokia brand) and Lexus (Samsung brand). 

Samsung would keep most parts. They are perfectly capable of supporting multiple platforms - they sold Symbian smartphones till 2010 and sell Windows Phone smarpthones still now. Plus they sell Android and bada now, and will introduce Tizen smartphones later. What would they do with smartphones? First, rush the two MeeGo phones N9 and N950 to every market. Then create the next upgrade to the MeeGo path to merge with Tizen of course. Resurrect any past Nokia MeeGo projects but shift them to Tizen. Then take the Symbian family and form a gradual migration path for them to bada and Tizen. Then take the Nokia dumbphone unit and prepare migration path to bada. And the Qt developer tools? Woudl be renamed something Samsung-ish and become the Samsung developer environment supporting all Samsung handsets of the future including Tizen, bada (Symbian, MeeGo, S40 etc).

The Nokia brand would be used to build Samsung's reputation in Nokia-strong markets like India, Africa, Brazil, China etc. Samsung's brand in Samsung-strong markets like USA, Europe would help boost Nokia as the lower-cost Samsung 'entry-level' brand.

Ok. Why? Because Samsung plus Nokia would give Samsung about half of all phones sold in the world. Not smartphones - all phones. Samsung plus Nokia would soon (after Samsung fixes some Elop mistakes) sell 2 million phones per day - 700 million phones per year ! There has never ever EVER been anything nearly as dominant on the planet. In just two years, Samsung would hit 1.4 Billion pockets ie 20% of all humans alive. Nokia at its peak had 1.3 Billion users worldwide as the most used brand ever seen in humankind - yes more than Levis jeans or Coca Cola or Sony or Timex or anything. And increasingly those would be smartphones! Just before the Elop Effect, Nokia was ahead of the curve migrating its total customer base from dumbphones to smartphones (Nokia's market share in smartphones was bigger than its market share in dumbphones. Samsung achieved that level now in Q1). If you thought that Microsoft Windows had a huge dominating position globally on a Billion desktops, Samsung would utterly dwarf that by buying Nokia.

Plus Sammy would get the protection of the patents portfolio which it needs to open markets against Apple. And Samsung woudl have a powerful tool to figth low-cost Chinese providers like ZTE and Huawei and others who manufacture in Shenzhen and ship globally - because Nokia's massive factories exist closer to the customers in the major markets. And Samsung more than any other suitor, would appreciate the value of Nokia customer insights - the deepest longest most thorough customer studies across 100,000s of consumers of mobile phones worldwide over more than a decade. Samsung would just cut off the deadwood of the Microsoft Mafia and in a matter of weeks, Nokia would turn to the mend, with Samsung bosses coming in and restoring sanity to Nokia. What Samsung would likely also do, is to recruit as many departed senior Nokia staff to join in a Nokia advisory board to help recover the damage done by Elop. Many would cherish that opportunity on a part-time highly compensated basis. Most are so loyal, they would not do this for anyone else like a direct competitor to Nokia. But to help restore Nokia back to what it was - they'd be happy to do that. And Samsung again knows, the insights that were destroyed with the Nokia senior management exodus - has been a horrid waste by Elop.

FACEBOOK

Then what of Facebook? Why? Well. FB knows that the future of the internet is mobile. The future of social networking is mobile. The future of computing is mobile. The future of Facebook itself is mobile. The way to make money in the IT business is increasingly through.. mobile. Facebook has 900 million users. Nokia sits in 1.2 Billion pockets. Most Nokia featurephones have full internet browsers nowadays and can very easily be adapted to have a Facebook button and go directly to FB. Nokia is one of only a few major smartphone makers who also has Blackberry-style QWERTY keyboard handsets for mass markets, so they would be particularly well suited for FB use by those who send tons of messages and like to write a lot of commentary. 

Facebook would have no need of NSN. They probably would keep the Navteq unit, why not. They would look at the crazy Elop strategy with Microsoft, talk to a few major Nokia customers, and fire Elop and end his silly Windows misadventure. Then, they would study that strange beast that USA has not seen, MeeGo - and see it is the perfect platform for Facebook Mobile. Nokia's whole smartphone unit can be migrated to MeeGo. It is Linux based, so there is ample programming skill. It is conveniently close to Android so many Android apps run natively, but Nokia's Qt tool is particularly useful as FB would recruit its own developer community. Facebook would have enough money to take the time to run this for a while but with the early love that all users and reviewers had of MeeGo, it would give FB a powerful step into offering a radical new cool and 'better' Facebook mobile experience than what other smartphone users have. They could legitimately claim that Facebook smartphone was better than the iPhone... Not bad.

Facebook would also gain a huge mess in damaged carrier relationships - which could be partially resolved by firing Elop and ending the Windows Phone startegy - but carriers do not want Facebook to replace Skype. This is where this strategy falls apart. The handset market is dependent on the support of the carriers/operators and they would not want to replace Nokia, the 'gentle giant' who knew its place and didn't try to take their operator business, with Facebook who wants to become the new internet.

So in a traditional cellular telecoms way of looking at mobile industry, Facebook to me would fail as Nokia's owner. The carriers would make sure it never succeeded. The total collapse of Nokia's market share would continue and no matter how much money Facebook would pump into this project, it would end up a dead donkey. But.. There would be the tech gadget angle otherwise - Facebook could definitely think of several revolutionary ways to try to make a go at it. WiFi networks, WiMax networks, perhaps MVNO business (like Virgin Mobile). None of those would succeed in the long run, but am sure there are plenty of consultants who'd sell these kinds of dreams to the Facebook management.

So to me, Facebook and Nokia is potentially a highly promising business opportunity but it would be seen as far too dangerous by the operators/carriers who would destroy it in the mid-term. That though, doesnt' mean Facebook wouldn't try. They could quickly dispense with some assets - they wouldn't have any need of NSN, so they'd sell that. They would not need the Nokia brand so they could take the low-cost handsets and bundle the Nokia brand with it, and sell to someone like ZTE or Huawei of China. Facebook would keep the smartphone unit but might even sell the Lumia unit to Microsoft to recover some of their investment, especially if Microsoft committed to some kind of Facebook support for some years - which of course like almost anything with Microsoft would then end up in the courts haha..

MICROSOFT NEEDS NOKIA

Microsoft then? Microsoft is hoping to have Nokia survive, so they can have their cake without paying for it. They also hope that Elop can sell off as many assets as possible, so that if Microsoft has to buy Nokia, they buy as little of the 'garbage' that Microsoft doesn't want - like NSN for example. Microsoft won't make a bid for Nokia - if Nokia is deeply in trouble, Microsoft will be able to provide loans and investments into Nokia but don't want to buy it, if Nokia can survive as an independent entity, at least in its smartphone unit - which Microsoft wants to go fully Lumia and Windows Phone / Windows 8.

But Ballmer is not stupid and he knows that Nokia's Lumia line is on life-support. Ballmer himself said in September that Windows Phone was not performing to his expectations, when he said Windows Phone sales were "below expectation". This was before Nokia launched Lumia, but after a year of Windows Phone sales. And yes, Windows Mobile once had 12% market share in smartphones. Windows Phone had managed 1% when Ballmer said that. Now with 6 months of Nokia sales, Windows Phone is up to.. 2% (and now its Elop who echoes almost exactly what Ballmer said, when Elop rates Lumia sales as "below expectations"). Hardly the Third Ecosystem haha.

So Ballmer knows that if anyone else buys Nokia, they will immediately discontinue the Lumia project as the ultimate waste of resources and a strategic dead-end. It is only a vanity project for Elop and Microsoft. So if there is a 'real' buyer emerging for Nokia, Microsoft has to step in and bid, so that Ballmer can keep the Lumia project alive. But I am very sure, that Elop would give Ballmer every kind of unfair insider advantage of what bids are coming in, who is bidding etc. This won't be a fair fight (nothing ever is with Microsoft haha).

But Ballmer doesn't want NSN or dumbphones or Symbian or MeeGo or even Navteq (actually MS would like Navteq, thanks to reader Tomifan for pointing this out with Bing maps). He also has no need for the Nokia brand. So Ballmer would very soon try to strike a deal with whoever is shopping for Nokia, to split the Lumia unit without Nokia branding, and sell that to Microsoft for some set price. Almost any buyer would also see the use in this, as the Lumia unit is not a profit-generator and any quick analysis says it is an endless sink of sucking resources into loss-making.

I think its most likely that if Nokia is sold, whoever buys Nokia won't be Microsoft but will almost immediately sell the Lumia unit (with Elop in charge) to Microsoft. If this happens, then we know it was conducted behind the scenes and a deal was done in the early bidding race when Microsoft pulls out. But if a hostile buyer - who doesn't like/trust Microsoft - buys Nokia (like say, Apple or Intel or Google), they could simply terminate the Windows Phone Lumia project - quite loudly and visibly of course - for the humiliation and damage to rival Microsoft, and not sell the unit. If this kind of rival is in the bidding, Microsoft will have to stay in the bidding wars as long as they think they can afford to.

If Microsoft buys Nokia, they would of course sell the NSN unit and the low cost handsets. They would escallate the end of Symbian and MeeGo projects. The Lumia unit would become a division of Microsoft with Elop in charge. The Nokia brand would be sold, being totally unnecessary in the Microsoft world. The carrier hostility towards Microsoft would only grow over time, the Lumia sales would linger in very tiny market shares (think Palm, not Blackberry) kept artificially alive by Microsoft for a couple of years, after which the unit would go the way of the Kin and Zune.

DEFENSIVE PLAYS

The two obvious defensive plays in the race for Nokia would be Apple and Google. Neither would have strong obvious gains from the purchase but might make it just so Microsoft or Samsung or Facebook or whoever, doesn't get Nokia. For both, the patents would be useful. Apple especially would love to be able to add Nokia patents to its pressure on Samsung - and stop the payments it now is doing on royalties to Nokia. Apple could use Navteq and make some use of Nokia's premium smartphones at top end Symbian (808 PureView) and N9/N950 MeeGo. What could be used would be folded into some future iPhone but never using Nokia branding. The one play Apple could do is to take the E-Series business/enterprise sales organization and perhaps some QWERTY competence to create a strong enterprise sales unit for the iPhone. Other than that, I think Apple would have no use for most of Nokia's smartphones and definitely none of its dumbphones. I doubt Apple would even want to take over the best smartphone factories, they would rather outsource all iPhone production to Foxconn/HonHai.

On Google's side it would be a conundrum. If Google adds Nokia to its Motorola purchase, it would break Android's support. Google would have to calculate would they rather own about 30% of the smartphone market making the handsets too (Motorola and Nokia) or own about 60% of the market making mostly only the operating system. Google would in any case terminate the Windows Phone, Symbian and MeeGo projects and migrate Nokia's smartphones to Android. Google would have no real use for the dumbphones unit nor NSN unit. Google could theoretically sell parts of Nokia including the branding, and hold onto the factories, and make the Nokia factories a kind of Foxconn/HonHai for Android family, to have various Android partners manufacture phones at Google's factories. Am not sure the profit margins of this kind of business would be really attractive to Google management though. Not really worth their while haha..

WHO ELSE

Who else might be in the hunt? If we think Samsung, then also LG is a dark horse, they could want Nokia to get back to about par with Samsung in handsets and reset the playing field and fight as equals. LG would not want the NSN unit but all handsets stuff yes. They'd consider the MeeGo platform and if not that, they'd go fully Android.

Sony might truly be serious about its mobile plans and decide they want to be big in mobile and buy Nokia for that. They would get the baggage of the featurephones unit that Sony has just been able to get rid of mostly in its own handsets, so they probably would sell the featurephones. They'd unload the Nokia brand too in that sale. I don't see value for Sony to keep NSN. But the Nokia global reseller channel would be a fast way for Sony to climb back, because it was part that they abandoned a few years ago when SonyEricsson was making perennial losses.

Intel might want to jump into the handsets for real. They really got close to it all, with many years of work with Nokia ever closer on the MeeGo project and must still be fuming inside how Microsoft ruined their clever MeeGo play with Nokia. Why not snatch Nokia from under Microsoft's nose - the end the Windows Phone project, push MeeGo at full power now, and migrate to Tizen. Intel would not need the featurephone unit - but - but - Intel could redesign Nokia basic phones to run on Intel chips - and redesign Intel chips to also support low cost phones. Might make sense. Then also sell those chips to other handset makers of course. Intel would have no need for NSN. They probably would keep the Nokia brand.

HP, Dell have tried mobile and retreated. Is there remorse? Nokia could be the way back once again. I doubt it. 

ZTE, Huawei would be in the hunt with rapid growth in mind, much like how Lenovo bought IBM's PC business. They could use NSN directly and all Nokia's handset parts including the brand. If they have visions of global play - the MeeGo platform and Qt (and ex-Ovi store) even offers a chance to have a platform to do an eco-system play. 

HTC - is so much currently in trouble, I don't see it. Same of RIM, can't see them considering buying another struggling handset maker haha. 

Panasonic, Sharp, Acer, Lenovo, Toshiba, Nintendo, Philips etc - there are other tech brands in consumer electronics and PCs who might have a secret desire to be big in smartphones - imagine if the CEO of Strategy Director had once had a plan to take the world with smartphones but his/her Board rejected the plan etc. But now Nokia would offer a chance to recapture it. Take someone like Nintendo - this company will go the way of Kodak and Polaroid if they dont' get into mobile phones soon. Or Panasonic, who once was a big handset maker, decided its not worth it, but recently have said they are coming back to the global race.

Or maybe a management buyout or maybe some consortium of clever outsiders (ex Nokia execs). If management buyout, would be middle-management revolt to kick out Elop and the Microsoft Mafia (ie total mutiny) or what of ex Nokia owners or some other perhaps wealthy Nokia shareholders, who are now fed up with the Elop madness and put in an investor package with some investment bankers, buy Nokia with some leveraged buy-out, and with the intention of pruning Nokia down but focusing on its core business and returning to the MeeGo (and Meltemi) based plan.

Thats whats on my mind today late Friday night as I think about Nokia as a possible takeover target. To any buyer - the company is not as damaged as it seems. The fundamentals are not bad. Nokia has been mismanaged. It can be nurtured to health in relatively short time, to be a valuable part of your business. But obviously in almost every case, the buyer would not want all of Nokia as it exists today.

PS to see what the recent situation has been in smartphones by the major brands including Nokia, Samsung, Microsoft Windows, Google Android, Apple etc - please see Smartphone Market in Six Graphs.

Comments

[Antoine RJ Wright]

Interesting... Samsung would be likely, but probably not because as you already note, they have followed and conquered Nokia in everything but networking and mapping. If Samsung wants to push their connected home approach, it's possible Tizen and NSN does it for them, but only if such a move keeps them agile.

Facebook actually would want NSN. For them, NSN would be the insurance that the platform stays optimized for carrier relationships. They would be smarter to sell off hardware, but keep related IP, and then to pitch non- behavioral software to a company that simply wants differentiation but not get sued in the process.

MS would want to do this, but it would be a fight with governments again. The investigation would stem from prior relationships, Elop, and the speed of descent without success for MS despite marketing investments.

Merging with RIM needs to be seen as an option. Or, at the very least a spin off of NSN, merging of it with a split RIM (BES and hardware), then repitching the brand of Nokia again as "connecting people," but on that deep packet level.

Apple is possible. Because if th profiles about Tim Cook are as I think, he might see opportunity with Nokia take over to ensure logistical flexibility and engineering expertise to ensure their next gen experiences (Siri, networking, humanities, and creative as service).

All in all, interesting. And that's what happens when I miss news to talk at conferences. Perhaps Tomi I should just tag along in your luggage and catch the beats as you and Q create new mental roads for us all. :)

[So Vatar]

I hope for a bidding war, I really do. But will it happen?

This is a high stakes game for the big boys. It is clear that Nokia in the current trajectory cannot survive on its own. Most players are mentioned by Tomi, but there at least 2 more that might be very interested: NSN and smart phones could be a great fit for Cisco. And don't forget Larry Ellison, Oracle does a superb job of buying companies and integrating them into their existing operations.

In addition to Oracle and Cisco and the companies named above by Tomi I can see consortiums of companies bidding for Nokia and - after successful bid - dividing the loot. There are many possible combinations.

One could be Microsoft and Cisco (maybe including Facebook). Windows Phone would power the facebook phone, Cisco would get NSN and make a deal for business handsets. Patent portfolio would be shared.

Oracle could also team up with Cisco, Larry would get additional firepower against Google / Android (I am pretty sure Larry did not like how the infringement lawsuits against Android went, and he is not the type to give up).

I also would not rule out HP as serious bidder again. They would be interested in the handset business (again Cisco or a Chinese for NSN), and could team up with Canon (printing business would be combined, imaging business would be aligned across all platforms, and HP would concentrate on Server / PC / Tablets including HP branded phones).

Many more combinations can be beneficial, including bids from firms outside the Hi-tech industry that want to buy in.

Interesting time, and I hope there will be a bidding war sooner than later. The longer Elop is allowed to continue, the less interesting Nokia gets for any potential buyer.

[eduardo]

"The Lumia Windows Phone unit is moderately successful in North America and desperately needed by Microsoft. So sell that unit to Microsoft"

That would be terribly embarrassing for Microsoft, an admission that WP 7 is a failure that ran its primary oem into bankruptcy. And who is to say that Microsoft would know how to run a mobile phone company?.

[cke]

In down times when the industry must consolidate the players, the luckiest ones are usually the smallest and most vulnerable. They are cheap and easy to buy and get bought first. The stronger ones are too expensive, have cash so they're not in a hurry, are the last to entertain offers. So all of the would-be potential buyers at an earlier time have already made their purchases and are no longer in the buying market when the strongest ones finally come around looking for buyouts. Not optimistic for Nokia.

[eduardo]

If the parts are worth more than the price, then you could get a pure investment banker bid that, if successful, would just sell the parts off to whoever wanted them. But I think Samsung would find Nokia much more valuable than its parts could be sold for, and so would make a higher bid.

[noel]

today i am very glad that Nokia has retake the good way of business. they are also biting the competition with Android market.

[Dipankar Mitra]

I initially thought it makes no sense for Samsung to acquire Nokia, except for the Nokia patents (we all know Samsung is being royally screwed by Apple in patent litigations). Now that I've read this, I guess there are more reasons for Samsung to buy Nokia. But once they do, there's going to be a terrible mismatch of organization cultures. Having worked at both Korean (LG) and Finnish (Nokia) handset makers, I can imagine the disaster of a merger it would be, from a org culture perspective.

[m]

1) Nokia's assets may not be worth as much as you think. They've already relinquished control of (but not financial interest in) many of them (possibly purposefully to avoid corporate raiders).

http://seekingalpha.com/article/624961-tales-from-nokia-patents-kidnapped-by-wicked-trolls-or-saved-by-kindly-godfathers-part-one

2) MS already has rights to many of Nokia's patents --- not just to *use* them, but to license them to others!

http://gametimeip.com/2012/03/07/another-smart-move-from-microsofts-patent-licensing-group/

Quote: Microsoft already “secured a license to the Nokia patents now acquired by MOSAID” and retains “a passive economic interest in the revenue generated from the licensing of those patents to third parties.”

Yes folks, another company acquires Nokia's patents, and Microsoft gets a cut of the spoils. The so-called "deal" with Microsoft has already sold to MS much or all of what they want from Nokia.

3) The big question is, what is the COST to a potential buyer, of the contractual obligation to MS. You can't just buy Nokia and say "Deal's off". Certainly, since it was a deal penned by MS employees at Nokia (ie. Elop) and MS, it will be very favorable to MS should anyone try to break the contract.

Conclusion: The valuable parts of Nokia were already sold to MS with the "deal", and the price was *less than nothing* (with minimum royalty payments to MS for licensing WP being only "slightly less" than the support payments from MS, plus MS already getting royalties from Nokia patents, the net cash flow is from Nokia to MS. The reason they appear to be a company being bled dry, instead of a company receiving ongoing lucrative investment capital, is that they are a company being bled dry). What Nokia got out of the deal is a promise of having a finger in the promised success of WP.

If Nokia is sold, MS will retain rights to some of Nokia's assets. That severely reduces the value of Nokia to any other company. Elop really signed a suicide pact, to ensure that it was Windows or Death.

[eduardo]

From the seekingalpha link above regarding the sale of the patents to Sisvel:

"this deal with Sisvel may be a way of protecting Nokia from a hostile takeover by a large, nouveau-riche, 4G-patent-poor manufacturer of cell phones, such as Apple (AAPL)"

[Louis]

I agree that Nokia doesn't seem like an attractive takeover target.

- No potential buyer wants all the business or isn't a huge cultural mismatch.

- A lot of the IP assets are already licensed or otherwise not available for a "clean" sale.

- The MS contract would, undoubtedly, be very expensive to get out of.

- Any strategy transition would need to be deeply bankrolled.

So, basically, Tomi's dream scenario is something like:

- A "Symbian restoration", ending the MS alliance

- Future strategy is Maemo/Moblin/Meego/Tizen software, hardware an Intel platform that nobody ships product on right now

- Reboot the Ovi brand

This all looks really, really heavy technically and from a communication standpoint, and won't be self-funding for another several years, at least. So, basically, the only hope here is a pure PE play.

Who's going to finance this in the middle of a banking crisis? I think somebody trolling stock message boards managed to make a thin market tick up.

[karlim]

Nokia acquired and split for parts is a bargain at today's price. And it has been a bargain for about a year now, even at twice the price.

The hostile takeover was the biggest threat to Nokia's future for a while now. During the transition (which was way worse then anyone anticipated, including Tomi) and until we can see whether the bet the company on MIcrosoft Windows Phone strategy succeeds or not. Which will happen in Q4/Q1.

The question is why not a single hostile bid for Nokia materialized yet. While Nokia was so cheap and a boon for any acquirer. Or why didn't some big activist shareholder came along - like they did for Yahoo or Motorola way earlier then those companies got in such sorry state as Nokia is now.

My bet is - that it's because Nokia is a Finnish company with shares listed in Finland. And either the board has an option of "poison pill" to fend off any acquirer or Finnish government holds some "golden share" or something to do with Finnish laws that make the hostile takeover not an attractive option.

If Nokia were to be sold for parts in hostile takeover - it would have happened months ago. And as it didn't it won't happen this summer too.

And it is still all about whether Nokia can make WP(8) strategy work or not. Which we will see in Q4/Q4. (With a bit of Meltemi added to the mix)

And if WP strategy fails - well- Nokia will sell itself for parts voluntarily about this time next year. It'll be that or bankruptcy

[MikaA]

To Karlim

According to my understanding, there is no such clause in Finnish law. The Finnish pension funds are somewhat invested in Nokia, but majority of the shares are *not* held by Finns. Do not expect a Finnish government intervention, I don't believe that could happen. The only reason I can think of why hostile bids have not appeared is simply the deal between Nokia and Microsoft, it is not known what are the exact terms there. Q2/2012 results will probably spark a reaction, though.

Somebody posted a comment about organization cultures, being a Finn and having worked in Asia, this is indeed a major factor. Finns are not known for adjusting in the more hierarchical Asian system.

[karlim]

@MikaA

Nope. There may be no such clause, but there is such thing as Finnish law. And AFAIK Nokia is a Finnish company listed on Helsinki stock exchange and subject to Finnish law.

And all those NYSE/Nasdaq ADRs are just a proxy certificates for a company shares, subject to Finnish law. No matter who owns them

[KPOM]

Apple has never done a "big" acquisition, since it is too difficult to integrate the takeover into its corporate culture. It would be entirely a defensive play. My guess is that they would want Nokia's patent portfolio and Navteq only, and thus would do the deal either only as part of a consortium with other companies who don't threaten them (e.g. LG, HTC, Sony), or with a plan to then sell or scuttle all the rest. Or perhaps they would just make a bid to force someone else to overpay. If it turns out that Nokia's deal with Sisvel has made the patent portfolio all-but-worthless, Apple won't be interested.

[Earendil Star]

What are we talking about here?

Nokia being taken over?

Have I been dreaming all the time or did this already happen?

This is pure short term speculation to lure naive investors, and possibly to retard further downgrading, so as to kick the can down the road for a bit longer. Or to fend off the class actions against Nokia.

It has been clear for long that MS quietly and covertly took possession of Nokia through THT Elop.
It is leeching it and will continue to do so until it dies.

M's analysis is spot on, and mirrors what I have repeated again and again. In the notorious February 2011 addresses by THT Elop, it became clear that MS was getting all the interesting bits of Nokia (e.g. store, Navteq, carrier relations, mobile software -YES - SOFTWARE- know how, mobile hardware know how, patents, etc.) for free. Subsequently, details emerged of the various Mosaid (a Canadian company... like THT Elop... what a coincidence!) and Sisvel operations, where Nokia gives its patents to a third party, and MS profits from the deal while being given the right to use the technology. All this is an attempted and large-scale rescue of the

REAL BURNING PLATFORM: WP.

Think: given WP's poor performance, Nokia could have asked ANYTHING from MS. MS was desperate to support its doomed WP platform, already declining after less than one year and hitting a 1%ish market share at its peak (before Nokia). Yet, Nokia ended up paying MS in the process. How can this even be conceivable? Nokia made the riskiest bet they could have (choosing the smallest OS on the market, immature, the one nobody liked nor bought), considering no Plan B whatsoever (terrible risk management) instead of going any other path? Which would have given them more flexibility, abitlity to differentiate and autonomy? E.g.: staying with Symbian / Maemo or going Android or both? Like Sammy (I would dare say successfully) did?

Saying that Finnish law is scaring prospective buyers is the most ridiculous thing I've read in decades. MS and its contract with its-Nokia-self THT Elop is what potential buyers dread. And this is why they will never consider Nokia as a target. They will, however, take a bit of the spoils when MS and THT Elop make them available for sale.

[Name]

Did Microsoft do to Nokia more or less what it did to Sendo?

From http://en.wikipedia.org/wiki/Sendo: "Under the deal with Microsoft, "Microsoft would obtain an irrevocable, royalty free license to use Sendo's Z100 intellectual property, including rights to make, use, or copy the Sendo Smartphone to create other Smartphones and to, most importantly for Microsoft, sublicense those rights to third parties.""

If so then they surely wouldn't need to buy Nokia at all! They already have what they want.

[AtTheBottomOfTheHilton]

I'd say that Finnish state should go in and save Nokia and get rid of the American investors. Is this a bad thing? Well, this is exactly what USA has done with General Motors when they were bankrupt. The irony is that USA i a strong free market and globalization advocate but when it comes to domestic problems, socialistic solution are apparently allowed. Something that the US usually would rage about if any other country did the same. The reason the US did this is because blocking foreign investors.

The Finnish government should intervene because this is no free market situation to begin with.

[karlim]

Aaah. @earendil and good old conspiracy theories. Would have chuckled and ignored it if not for the last paragraph.

If you've been in business at least a bit you'd know that every contract can be broken/dissolved. Then there are courts do determine damages. And with good lawyers that potential bidder can certainly afford - they will be rather small. Especially if contract was signed in bad faith by Elop from Nokia's side. So your MSFT/NOK contract scaring potential bidders theory is ridiculous.

Nokia was cheap for what it is a year ago. It is even cheaper now. MSFT contract if broken - will cost 500 million they paid Nokia already and not much else. So why is nobody interested in Nokia for a year now if it's as great a company as you and others here claim?

Nokia is either a dud on the way to bankruptcy no matter what, or there's something in ownership structure that prevents a hostile bid

[J.O. Aho]

Have to say that Samsung hasn't copied everything they should of Nokia, looking at the developers phone Samsung Tizen, it's too much a copy of Android and lacks the feel as Maemo/MeeGo had.

I would think Samsung instead of bidding on Nokia (unless they want patent portfolio), they instead try to get as many of the developers Maemo/MeeGo who worked for Nokia and would be cheaper too.

Most likely I think would be some Venture Capital company who buys up Nokia, splits it up and sells the parts to highest bidders.

[Louis]

@karlim: "So your MSFT/NOK contract scaring potential bidders theory is ridiculous."

The exit cost of the MS agreement would just be one of many costs to look at for somebody who wanted to buy Nokia and pursue such a strategy. It might not be overwhelming by itself, but it couldn't help.

Similarly, we don't know what Apple's patent license looks like, and how much protection it has in case of a sale (probably a lot). Ditto for all the patents that got moved to various 3rd parties (trolls).

All of this requires a quantitative analysis. My personal guess is that even at the current market cap, in today's environment, the numbers will not come out well for a buyer.

"Nokia is either a dud on the way to bankruptcy no matter what, or there's something in ownership structure that prevents a hostile bid."

These aren't exclusive statements, since a complicated internal structure and lots of weird dependencies could be a business liability for operating the company and make selling parts difficult.