Hostile Takeover Bid for Nokia: Will it Redefine Industry Metrics?
It’s a known fact that Nokia Corporation NOK was once considered the global pioneer in advanced mobile communications. However, it is currently struggling to stay ahead of the curve, especially at a time when the world is transitioning to 5G.
Under the leadership of CEO Rajeev Suri, the Finland-based telecom gear maker’s stock has tumbled 40.1% compared with 15.1% decline of the industry in the past year. The beleaguered company, which is now on the verge of a hostile takeover by an anonymous private equity firm, is resorting to every possible course of action to turn the tables gradually, thereby bolstering its market position in the global arena.
What Ails Nokia?
Nokia’s reported abysmal performance last year, primarily due to operational inefficiencies, escalating cost of sales and intense competition coupled with its inability to match rapid technological advancements. Financials took a backseat as gross margin was negatively impacted by a high cost level associated with its first generation 5G products, product mix and profitability challenges in China. Having faced significant challenges in mobile access and cash generation, the company decided to suspend dividend payouts and withdraw its financial outlook for 2020.
Of late, Nokia has not been able to keep pace with the likes of Ericsson ERIC and Huawei. Markedly, the gradual dominance of Huawei proved to be considerably distressful for the Nokia as it apparently dreaded losing its competitive edge in the 5G race. Time and again, the Trump administration has considered Huawei to be a high-tech Trojan Horse as well as requested federal agencies to abstain from using its products over potential risk of espionage and security concerns. However, the move did not sit well with various rural U.S. carriers that mostly rely on Chinese imports as Huawei’s equipment components are substantially cheaper compared with the ones provided by Nokia and Ericsson. A sluggish financial performance has compelled Nokia to cut nearly 5,000 jobs during 2019, 180 in January 2020 and hint at further downsizing.
Notably, the company has been a victim of these vulnerabilities as it witnessed elevated 5G product costs in the Networks segment with higher levels of deployment service costs. Paucity of demand due to challenging macroeconomic climate and geopolitical uncertainties have affected its margins. The weak performance was further aggravated by temporary capital expenditure constraints in North America related to the merger of T-Mobile TMUS and Sprint. Nokia’s ability to bounce back on growth and profitability was primarily hampered by its struggle to be on par with Ericsson, which spends billions of dollars on R&D. To date, the Sweden-based firm has inked 88 commercial 5G contracts with operators worldwide while Nokia’s tally is at 66.
Hostile Takeover Bid
In February 2020, Nokia was reportedly mulling to explore a couple of strategic options like investment shift, asset sale or a potential merger with Ericsson in the face of intense 5G competition. Impressively, the merger, which is anticipated to aid both the companies, will not only tackle aggressive pricing structure adopted by China-based counterpart, Huawei, but will also help Nokia to emerge as a dominant player in the realm of next-gen mobile networks.
Grapevines of a takeover bid do not look surprising, as the company has long been struggling to find a path to profitability. On Apr 16, Nokia’s share moved up 7% on the news. With investors drooling at the prospect of a potential deal, it is estimated that the total valuation of the rumored deal will be worth up to $17.4 billion. That said, Nokia has enlisted the services of Citigroup C to counter such alleged transaction.
However, it is optimistic about merger talks with Ericsson. The arch-rivals share complementary strengths with each other owing to their geographic proximity. Such a combination is likely to be mutual rather than hostile as Nokia does not envision any fit with Samsung or Huawei.
Redefining Industry Dynamics
Despite the above-mentioned challenges, Nokia has been undertaking efforts on the product and service development front. Last month, it accelerated its position in IoT with a new managed service platform backed by 5G and edge computing. The company which produces 5G RAN equipment, confirmed that the hardware will comprise 35% of 5G shipments by the end of 2020 and 70% by the end of 2021. Nokia is holding joint trials with Vodafone and Korea Telecom to testify the viability of network slicing and massive Multiple Input Multiple Output technology on emerging 5G business models.
After achieving a semblance of stability, Nokia believes its end-to-end capabilities are a key differentiator in the 5G equipment space. At a time, when the telecom companies are resorting to a multi-vendor approach, the Finland-based company insists that procuring equipment and services from a single vendor can reduce total cost of ownership by more than 20% as well as reduce time to market by at least 30%. This, in turn, is driving Nokia’s goal to reduce costs by $556 million by the end of 2020.
Although the Zacks Rank #3 (Hold) stock has been struggling amid intense competition and geopolitical tensions. It is one of the few companies that leverages best-in-class technological capabilities to transform the way people and things communicate and connect with each other. With more and more rivals seeking to prey on Nokia’s market share, the company seems confident to revive its go-to-market strategy with roadmap investments. Much of this solid momentum can be attributed to its foundation of mutual trust and confidence from the existing pool of customers that enabled seamless transition from 4G to 5G.
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