A few months back, the news was abuzz with the announcement that Nokia (NYSE:NOK) would be selling its handset division to Microsoft (NASDAQ:MSFT). Now, almost eight months later, the deal has officially closed and Nokia no longer has the financial burden of its declining handset division.
This deal marked Nokia’s switch in focus from phones patents and its research and development business. So now that the deal is finally sealed, what can we expect to see from Nokia in the next five years in terms of its new business focuses? And how much of a role will Microsoft have in Nokia’s new trajectory?
Last Minute Changes to the Handset Transfer Deal
The nearly eight-month ordeal that Nokia and Microsoft went through to make this deal happen was fraught with delays and obstacles. One of the biggest setbacks was the legal troubles regarding one of Nokia’s factories in India. By April 25, when the deal finally came to a close, however, Nokia was able to sell off its handset division for slightly more than the original $7.52 billion that the companies originally agreed to.
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However, because Nokia was unable to resolve the issues it had been dealing with in India, its 8,000-employee factory in Chennai that manufactures handsets was left out of the deal. This means Nokia will now produce phones for Microsoft in this factory as a contracted manufacturer rather than handing the facility over directly.
This arrangement will not be for the long term, however. As soon as the tax disputes with the Indian government are resolved, Nokia will hand the factory over to Microsoft as originally planned. It is estimated that Nokia will have to produce phones as a contracted manufacturer for about one year while it resolves these legal issues. After this time, it will be able to wipe its hands clean of the unprofitable handset business entirely.
Nokia’s New Direction
With this deal, the company plans to shift its focus on its highly profitable portfolio of patents as well as investing in research and development. The exact details of the new direction Nokia will be taking are slated to be announced on April 29 along with its scheduled earnings report.
During this same scheduled report, Nokia is expected to announce Rajeev Suri as its new CEO. Suri currently heads the company’s NSN (Nokia Solutions and Networks) division which he managed to completely overhaul and turn into a profitable component of Nokia’s business. This change in leadership hints at the direction in which Nokia will be moving.
As it is now, Nokia earns nearly $700 million annually from its patents alone. Now that the deal with Microsoft has finally closed, that number is accepted to increase by $828 million per year. That is, it will more than double each year. Part of this rapid growth can be attributed to Microsoft which — as part of the handset deal — will be paying about $2 billion to Nokia in order to license the necessary patents for the phones.
In order to boost its patent revenues further, Nokia will invest heavily into its Research and Development division. With the increased investment here, the R&D division is expected to grow by about 3.4% per year over the next five years.
The full potential of its remarkably large patent portfolio is hard to nail down. Historically, Nokia has not monetized its patent portfolio well, using it primarily to defend its unprofitable handsets. But, now that Microsoft has taken that division off its hands, Nokia will be able to sell a wider range of the nearly 30,000 patents it already holds.
The report scheduled for April 29 will likely result in a boost to Nokia’s stock as more investors get a clear picture of exactly what the company’s plan is going forward. The official closure of the deal with Microsoft already boosted Nokia’s stock and as its exact strategy for the future becomes clearer, we can expect to see further growth in the coming weeks as confidence in the company increases.
The next five years are looking very good for the company. With the sheer number of patents it currently holds (and the relatively high percentage of essential patents that every smartphone manufacturer will need), Nokia probably should have made this transition years ago. Now that it finally has, the coming years are looking very bright for this once-struggling company.