Four Reasons Why Apple Should Buy Nokia
By Leo Sun - February 11, 2013 | Tickers: AAPL, GOOG, MSFT, NOK | 8 Comments
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Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
Recently, one question has dominated Wall Street headlines: what should Apple (NASDAQ: AAPL) do with its $137 billion cash pile? Hedge fund manager David Einhorn, who recently sued the Cupertino, California-based company, certainly believes that Apple should loosen its purse strings to reward its investors. Einhorn’s argument is simple: Apple, which has lost 23% of its market value over the past six months, needs to either maximize its growth potential through acquisitions and research, or pay back shareholders with a bigger dividend or stock buybacks.
My answer is much simpler - Apple should buy Nokia (NYSE: NOK). The purchase would be a powerful, industry-altering gambit that would remake the mobile market forever. In this article, I’ll explain how acquiring Nokia will boost the company’s patent portfolio, emerging markets exposure, and take out its arch rival Microsoft (NASDAQ: MSFT) all in one fell swoop.
Hoarding Hurts Growth
It’s unusual for companies to hoard cash the way Apple does. Companies generally keep enough cash on hand for annual operations, and use a combination of cash, stock, and debt to finance acquisitions. While all that cash is a nice fund for a rainy day, inflation and missed acquisition opportunities will hurt the company in the long run. Most importantly, it doesn’t make a stock a better value for growth, although it strengthens two core metrics of financial stability - price-to-book and debt-to-equity ratios. Apple is ridiculously strong in both departments. What investors want is proof of growth, and acquiring Nokia will allay those concerns.
Nokia is worth approximately $15 billion, and factoring in a generous acquisition premium of 33%, it would only cost $20 billion in cash to take over the former heavyweight of the handset world. Nokia’s stock is also on sale, trading at a mere 1.44 times book value. Nokia is shouldering $7.18 billion in debt, but that’s still pocket change for Apple.
Here are the primary reasons an acquisition would be a bargain that would contribute strongly to Apple’s future growth.
Reason 1: Patents Galore
Just as Google (NASDAQ: GOOG) acquired Motorola to expand its defensive moat with its patent portfolio, Apple needs Nokia’s extensive patent portfolio, which consists of lucrative LTE and 4G technologies, to maintain an edge over Samsung and its fellow Android competitors. That patent portfolio alone is worth an estimated $6 billion to $10 billion.
Acquiring Nokia would also cancel out Apple’s previous settlement with the company in 2011, which required it to pay between $5 to $7 per iPhone in patent royalties.
Nokia's patent portfolio also contains patents for delivering TV channels wirelessly over the Internet, which could be a valuable piece of the puzzle for its long rumored smart television project.
Lastly, Apple could take apart Nokia’s patent portfolio, keeping the patents it needs while selling the rest to other telecom businesses for a hefty profit.
Reason 2: A Wider Variety of Handsets
It’s increasingly apparent that Apple needs to mix things up with the iPhone. Analysts forecast that Apple needs a lower-end handset to maximize its revenue growth.
Nokia’s Lumia and Asha series have performed exceptionally well in lower-end markets. This would allow Apple to capitalize on Nokia’s growth in emerging markets without fear of cheapening its own brand. In the future, Nokia-Apple dual branded handsets could yield some unique mid-range options featuring either iOS or Windows Phone 8.
Reason 3: Chairs will fly in Redmond
Microsoft CEO Steve Ballmer is likely to throw a few chairs if Apple acquires Nokia. The move would cripple Microsoft’s mobile operations immediately, since Nokia still produces 76% of all Windows phones.
Apple could then either continue producing Nokia Windows Phones, ironically using its rival’s technology to generate revenue, or discontinue it and replace its entire handset line with iOS technology.
When Google acquired Motorola, the former handset kingpin had almost no prospects for recovery. In contrast, Nokia isn’t down for the count yet. Although CEO Stephen Elop’s recovery efforts have been paying off, critics claim it may be too little, too late.
What Nokia needs most right now is cash, as evidenced by the cancellation of its dividend. An infusion of cash from Apple could be what it needs to increase the Lumia’s market share.
Reason 4: Apple Maps
Horrid memories of melting cities, dislocated cities, and railroad track driving routes still haunt the memories of Apple Maps users. That distorted mess was the company’s worst blunder in years, and forced it to allow Google Maps back onto iOS platforms.
Nokia surprisingly owns some of the best mapping software in the business, after it acquired Navteq in 2007. Google, Blackberry, Microsoft, Amazon, and Samsung all depend on Navteq technology to some degree. Acquiring Navteq would be a brilliant move that mirrors Google’s acquisition of travel search engine ITA back in 2011 - it would take control of its competitors by buying (and charging for) the back door.
Nokia also paid $8 billion for Navteq. Claiming that valuable piece of technology, along with the rest of Nokia for $15 billion to $20 billion, would be a steal.
The Foolish Bottom Line
For now, Nokia’s on sale. But under Elop’s ambitious guidance, it may not be a value stock for much longer. At most it would cost Apple $30 billion to acquire Nokia and cover its outstanding debt. That’s a mere 22% of its cash hoard to invest in a future beyond the confines of iOS devices. Acquiring Nokia would expand Apple’s defensive moat, destroy Microsoft’s mobile business, and give it valuable leverage over its Android-based competitors.
That, Mr. Cook, would be money well spent.
Sentiment: Strong Buy
Stop propagating motley fool's trash. It's 100% pure trash, they do little to no DD. tomorrow they'll put out an article giving 4 reasons why Nokia will go bankrupt and shorts will pass that around.
Stop being the fools getting played almost on a daily basis with catchy titles and empty essays with zero research. Stop clicking on any fool article cause they are utterly worthless. They'll never go out of business or change their BS reporting as long as newbie investors keep clicking on their worthless click bait articles. No matter how enticing they make the title, show you got nuts and don't take the bait - that's all their articles are, bait for fools.
Sentiment: Strong Buy
Apple is not at war with Microsoft. That war ended decades ago and Microsoft won. Jobs himself said that. Microsoft and Apple are allies in some areas. Microsoft's Mac Business Unit has consistently been one of their most profitable divisions for many years.
Apple Maps is now a total non-factor. It was an embarrassment for sure, but Google Maps for iOS made the issue moot.
As for selling a wider variety of handsets, that could go either way. Apple could do that themselves if they chose to go in that direction.
The patents though are DEFINITELY valuable. And considering how much Apple pays Nokia annually for those patents that part of the deal finances itself. If Apple were to buy Nokia for $20 Billion, and if they paid Nokia $1 Billion annually in royalties, you can deduct that amount from the purchase price to get a "real cost to Apple" value. You could probably deduct 5 years of royalty payments to get a more true cost to buy Nokia. Then there's the income those patents generate (and will generate) from other companies paying royalties.
On the negative side, the spat with IDCC is still an unknown.
If Apple can buy Nokia for $20B + debt they should do it. In the long run they would come out way ahead. But alas they won't nor would MSFT sit back and let it happen. Nokia is the foundation in which MSFT plans on growing their mobile business. Without Nokia MSFT's growth prospects face a dire future. Which is why MSFT should bite the bullet and buy Nokia now while the price remains depressed. Nokia shouldn't consider a sale for anything less than $30B + debt assumption. Because of their valuable LTE patents and mapping Nokia is really in the catbird seat now.
I think all the players in this game know better than to make an offer for NOK. It would start a bidding war that would become the most expensive aquistion in market history. JMO
Sentiment: Strong Buy
Anybody acquiring NOK for $30B would be literally stealing it. Hard to believe it could be sold for anything less then $40B & that would be a bargain. Truth is both AAPL & M$FT need NOK & both have the cash. A good debate can be had from both sides.
Do I hear $50B?
i just posted the article...a short term buyout may bring $8 - $10 per/sh for NOK...however, growing revenues, reducing debt and capturing market share would bring a pps in the raqnge of $20 - $25 in 3 years and possibly as high as $35 - $40 in 4-5 years....or sooner depending on market acceptance of Lumia phones and a tablet...let's not forget that NSN is growing exponentially Q over Q now
my personal feelings are that if you are truly long (4-5 years) then a buyout would be bad ...if you are a trader, then it is what you want...i am long NOK...
Sentiment: Strong Buy
"Nokia also paid $8 billion for Navteq. Claiming that valuable piece of technology, along with the rest of Nokia for $15 billion to $20 billion, would be a steal."
He's right that $15 to $20 billion would be a steal. That's why Apple would likely have to pay double this amount to even start a discussion. A 33% premium (at $20 billion) for Nokia right now is a complete joke. Doesn't even merit consideration by anyone.