Nokia buys Siemens stake in NSN joint venture – will an exit from the phone business follow?
For the past three years, markets have been trying to guess whether or not Nokia would dump its stake in the Nokia Siemens Networks, a mobile infrastructure joint venture. The mobile network market is tough and Ericsson is widely viewed to be far ahead of Nokia in terms of selling operators value-added services. Since NSN has some traction in emerging markets, an Indian buyer has been thought to be one possibility. But on Sunday night, Nokia announced that it is actually buying the Siemens stake in NSN for $2.2 billion. This is not chump change for Nokia, which has less than 5 billion euros in net cash and has stopped paying a dividend to conserve its cash reserves.
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Why would Nokia gamble like this? NSN was surprisingly profitable in 2012, but the infrastructure market is notoriously volatile and the next global recession will likely trigger another painful CAPEX spending freeze, pushing NSN back into the red. It is impossible to forecast when this might happen. Nokia’s feature phone business missed its sales expectations by 10 million units in Q1 2013 and the rapidly softening feature phone market threatens to pull Nokia’s entire handset operations into red for the foreseeable future.
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Why would Nokia shrink its cash reserves and increase its exposure to the mobile infrastructure market at a time when it is impossible to say when its mobile phone operations will return to profitability?
One possible explanation is that Nokia may be preparing ditch its mobile phone unit and turn into a mini-Ericsson. In the second quarter this year, NSN is expected to turn a modest profit, while Nokia’s operating margins in its handset unit are likely to come in around -2%. Right now, Nokia’s mobile network business is more profitable than its phone business. Alcatel Lucent is wobbling badly and Nokia might have a shot at becoming the No.2 mobile network company globally in the long-term, particularly as Chinese vendors are locked out of the North American market for security reasons.
This would be a very risky move considering how volatile the global mobile infrastructure market is. But the idea that Nokia is going to keep both its handset and network businesses under the same roof seems even riskier: It would expose Nokia to a double whammy in terms of losses if the world slips into a recession in 2014.
We are likely to see a spate of feverish speculation about Nokia’s handset unit in the coming days.
This article was originally published on BGR.com
