Nokia (NYSE:NOK) has evolved quite significantly over the past few years, divesting several businesses while integrating and acquiring others in an effort to improve its scale and competitive positioning. Historically known as a mobile phone manufacturer, Nokia sold this business to Microsoft for $7.2 billion in 2013. The company also sold its HERE mapping business to a consortium of German carmakers for € 2.55 billion in 2015.
Nokia largely retained its mobile technology patents after selling off its phone business. As a result, the company now has a patent/technology licensing business which has generated close to $1 billion/year in high-margin revenue. The company is also working to license non-essential patents.
Nokia acquired Siemens’ stake in Nokia Siemens Networks in 2013 and management did a good job restructuring the business and restored profitability to an industry-leading level. More recently, Nokia acquired Alcatel-Lucent. These acquisitions resulted in a market consolidation for wireless infrastructure, with Ericsson, Huawei and Nokia as the top three vendors.
Additionally, the moves have a number of potential benefits for Nokia, including:
- Improve Nokia’s scale and positioning in the network infrastructure market: The acquisitions of NSN and Alcatel-Lucent help improve the combined company’s scale and strengthen its internet-protocol and software-defined-networking portfolios.
- The new Nokia has a fully converged networking solution:
This means the company can now offer carriers a full end-to-end networking solution.
- Restructuring and synergy potential: The two acquisitions have led to significant synergies for Nokia, including a reduction of over $1 billion in annual operating expenses.
Many investors have been concerned about the current demand environment for wireless infrastructure. The wireless network market has seen flat overall spending for five years, with the exception of the interest generated during the deployment of long-term evolution (LTE, used for high-speed wireless communications for mobile phones and data terminals) across developed markets and Asia. Moreover, the outlook for the next few years for wireless infrastructure is poor, with China’s LTE spending having peaked.
In addition to these industry-wide challenges, Nokia’s share price has also been affected by worries over merger-integration risk. Nevertheless, in our view the risks are outweighed by the company’s positive attributes, which include:
- Its solid competitive position driven by growing long-term demand for wireless networking equipment
- A good track record of portfolio streamlining and operational rigor over the past five years
- A strong balance sheet and capital-usage plan.
From Brandes Global Equity Fund second quarter 2016 commentary.
