Nokia weighing strategic options as the profit pressure rises

Oshine Tripura | February 28, 2020

Nokia weighing strategic options as the profit pressure rises
  • Nokia is reportedly exploring the possibility of a merger or acquisition.

  • The firm is in a fierce rivalry with Ericsson and China’s Huawei Technologies Co.

  • The December announcement that Nokia Chairman Risto Siilasmaa would step down stirred speculation about deeper changes at the company.


According to a recent Bloomberg news, Finnish telecom network provider Nokia has been exploring strategic options and is working with advisers to consider potential asset sales and mergers. Nokia is reportedly deliberating as fierce competition puts pressure on the Finnish network equipment maker’s earnings, people familiar with the matter said.
 

The company is working with advisers to consider alternatives ranging from potential asset sales to mergers, the people said, asking not to be identified because the information is private. Other options include shifting investments and making balance-sheet adjustments.
 

The people also added that deliberations are ongoing, and there’s no certainty they will lead to any transactions. A representative for Espoo, Finland-based Nokia declined to comment.
 

The report states that Nokia shares have lost roughly a third of their value over the past year before news of its deliberations. The stock said to have rose to 3% on Thursday.
 

The firm reportedly cut its outlook and suspended its dividend in October, saying it’s not expecting a major recovery in profit until 2021, prompting Chief Executive Officer Rajeev Suri to act.

“If exploring strategic options, only viable ones are a sale to an unrelated Tech company or asset sales.”

-JP Morgan analysts


The telecom network, which competes with Ericsson and Huawei [HWT.UL] for 5G network equipment, commented earlier in February, expecting intense competition to continue in 2020, as rivals seek to grab market share.

 

5G networks are at the center of a brewing technology war between United States and China, as they are expected to host critical functions including driverless vehicles, smart electric grids and military communications.
 

Earlier this month, U.S. Attorney General William Barr said the United States and its allies should consider investing in Nokia and Ericsson to counter Huawei’s dominance in 5G technology.
 

One possibility Nokia could also consider is combining with a competitor like Ericsson AB or partnering in certain business areas. Still, such a move would face significant hurdles including political pressure to preserve jobs as well as antitrust scrutiny.
 

Learn more: US CAMPAIGN AGAINST HUAWEI'S 5G ROLE IN UK SET TO CONTINUE
 

The limited number of direct rivals to Nokia would also require the company to consider interest from further afield -- like technology companies or wireless operators -- if it were to ever seek a full sale.
 

The December announcement that Nokia Chairman Risto Siilasmaa would step down stirred speculation about deeper changes at the company. The firm is in a fierce rivalry with Ericsson and China’s Huawei Technologies Co., as the three dominant players seek to benefit from phone carriers’ investments in next-generation mobile networks.

“Nokia’s return to sustained growth and profitability has been delayed by its struggle to transition to a cost-competitive 5G hardware design, impeding its ability to compete, in our view. The 5G spending cycle is ramping up as commercial launches gain momentum, putting Nokia at risk of losing early awards.”

- John Butler and Boyoung Kim, telecom analysts, Bloomberg Intelligence


New 5G technology is expected to host critical functions from driverless vehicles to military communications. Larry Kudlow, President Donald Trump’s top economic adviser, said the U.S. government isn’t in the business of buying companies. He has since announced plans by the White House to hold a conference with Huawei rivals to try to accelerate development of affordable competing products.

 

Learn more: NOKIA LAUNCHES CERTIFICATION PROGRAMME TO BOOST ENTERPRISE 5G
 

Nokia warned this month that, excluding China, its addressable market is likely to be stagnant this year compared with 2019.
 

The mobile telecom network industry has consolidated heavily in the past decade, with Nokia buying out Siemens from a venture and acquiring Alcatel-Lucent, leaving just three global players.
 

In October, Nokia slashed its 2019 and 2020 profit outlook and halted dividend payouts, saying profits would come under pressure as the company increased investments in 5G technology.
 

Nokia’s shares plunged after the company cut its guidance and suspended its dividend in the face of intensifying competition from Huawei and Ericsson (ERIC), as telecommunications carriers roll out 5G wireless networks. Nokia said at the time that third-quarter gross margin was hurt by “a high cost level associated with our first generation 5G products; profitability challenges in China; pricing pressure in early 5G deals; and uncertainty related to the announced operator merger in North America,” a reference to the pending merger of Sprint (S) and T-Mobile US (TMUS).
 

At the time, Nokia CEO Rajeev Suri had said the corporation would redouble efforts to lower the cost of its 5G infrastructure by investing in product development.
 

Nokia has marketed itself as a beefy 5G provider, flogging a product set that stretches from the radio-access network (RAN) to the underlying management suite.
 

On the other hand Nokia’s competitor Huawei, despite its troubles in the West, remains a strong due to its ability to undercut the competition on price. This has led some to accuse Huawei of being the recipient of state subsidies – a charge the firm steadfastly denies.
 

As it struggles to catch up with competitors, Nokia’s acquisition of French rival Alcatel-Lucent in 2016, which helped to broaden its offering, may have slowed down development of new products as it contended with a complicated integration process.
 

It's not clear what will happen next for Nokia. One possibility mooted is a merger with Ericsson – its biggest European rival. A source close to the company said there was no truth to the report. Nokia declined to comment.

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