Finnish networking equipment maker Nokia is reportedly working with advisors to explore new directions for the company, including the possibility of a sale or merger, according to inside sources cited by Bloomberg.
Business Insider Intelligence
While Nokia denies the reports that it’s looking to sell or merge, recent financial problems and fierce competition could necessitate the move. In Nokia’s Q4 2019 results the company described the year as “challenging” and acknowledged issues with cash generation. These issues led the company to cut its 2019 and 2020 profit outlook and pause its dividend payments to free up cash for 5G investments; the company doesn’t expect it will be able to reinstate dividends through the first three quarters of 2020.
If the company is unable to boost its cash flow, it could find itself in an increasingly precarious financial position, in which a sale or merger is one of the few paths for the company to remain viable amid fierce competition. Despite its financial woes, Nokia still has valuable assets that could offer strategic benefits — Nokia holds the second-largest networking equipment market share, and was among the first manufacturers to offer 5G networking equipment.
Here are a few groups that might be interested in purchasing Nokia, should it choose to sell:
- The US government has voiced support for the idea of acquiring a controlling share in an equipment maker to counter Huawei, which it considers a security threat. Despite security concerns, Huawei’s equipment remains attractive to network operators because the company can offer lower prices than its competitors. US Attorney General William Barr spoke at a conference in early February about the government potentially buying a private equipment manufacturer to counter Huawei, with specific reference to Nokia: “These concerns [about Huawei] could be met by the United States aligning itself with Nokia and/or Ericsson through American ownership of a controlling stake, either directly or through a consortium of private American and allied companies.” A US government-backed equipment maker could provide subsidized equipment to telecoms at the same price point as Huawei, which tends to cost 20%-30% less than its competition.
- A large multinational tech company could buy Nokia to break into a new product segment. Companies like Microsoft, HPE, or Dell have large global footprints and enterprise-oriented technology businesses which would be complemented by the ability to offer networking equipment as well. The connectivity market presents a significant opportunity for these companies — in the US alone, telecoms’ annual spending on cellular infrastructure is expected to grow quickly to $47 billion in 2022, up from $35 billion in 2019, per Business Insider Intelligence. Purchasing Nokia would give a large enterprise tech company access to Nokia’s technology and patents, along with its existing client portfolio. And it would present an easier path into the connectivity market than developing proprietary equipment and building new client relationships from scratch.
- A smaller company in the networking equipment market could look to leapfrog the competition by merging with Nokia. A competitor with a lower market share, like Cisco or ZTE, could step up to acquire or merge with Nokia in order to form a more robust competitor to Huawei, the clear market leader. Equipment makers are, for the most part, losing market shares while Huawei grows its lead — Huawei’s market share was 11.8 percentage points higher in 2019 than its nearest rival, up from 11.4 in 2018 and 9.8 in 2017. By pooling resources and technology, a combined company could better compete at the top of the market to win highly competitive 5G contracts, which are shaping the future of the industry — Huawei claims to have over 90 commercial 5G contracts globally with 47 coming from network operators in Europe, Nokia and Ericsson’s backyard. For comparison, Ericsson follows Huawei with at least 79 commercial 5G contracts globally, while Nokia trails in third with at least 63.
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