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Nokia-Microsoft Deal Gets Chinese Approval

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The sale of Nokia Corporation’s (NOK) handset division to the world’s largest software maker, Microsoft Corporation (MSFT), overcomes one of the key hurdles after Chinese authorities gave the green signal for the pending deal. The transaction was supposed to be closed by the end of March but got delayed due to regulatory and legal obstacles from certain antitrust authorities in Asia. However, it is expected to be complete by the end of this month.

The deal has received approval from the European Commission and the U.S. Department of Justice. Chinese authorities took more than 30 days to give a go-ahead signal to the Nokia-Microsoft deal. Some Chinese handset makers like Lenovo, ZTE, and Xiaomi have raised apprehensions about the deal and believe that it might result in Nokia charging higher patent fees. Nokia has created a new revenue stream from intellectual property licensing rights. We believe the company may charge higher patent fees to mitigate losses of its handset business segment. According to the Finnish handset maker, the regulatory approval from several antitrust authorities involved assessment of Nokia’s patent licensing practices.  

However, Nokia is still facing a major tax dispute in India. The Tamil Nadu tax department has charged Nokia with a 300 million euro sales tax bill for selling handsets – manufactured in the company’s Chennai plant – in India instead of exporting them.

Last year in September, Microsoft announced the $7.2 billion (5.44 billion euros) deal with Nokia. Per the agreement, Microsoft will take possession of Nokia’s devices business, which boasts the very popular Lumia line of smartphones that run on Microsoft's operating system. Microsoft’s revamped mobile operating system (:OS) has been facing severe competition from Google Inc.’s (GOOG) Android and Apple Inc.’s (AAPL) iOS.

The pact will enable Microsoft to cash in on opportunities in the rapidly evolving mobile phone segment. On the other hand, Nokia is emphasizing on the network infrastructure segment for its future growth. After the successful culmination of the deal with Microsoft, Nokia will receive majority of its revenues from base stations, antennas and other network equipment.

Nokia currently has a Zacks Rank #1 (Strong Buy). The slashing of its unprofitable Device segment coupled with growing popularity of its HERE mapping business will not only drive margins but will also boost revenues. Moreover, continuous contract wins, aggressive deployment of the 4G LTE network across China together with higher capital expenses related to network restructuring in emerging nations may bolster top-line growth for Nokia in the near future.

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