Nokia collapse triggers takeover speculation

Nokia's share price plunged 18 per cent after the company forecast a larger second quarter loss than anticipated. The company also announced it will cut as many as 10,000 jobs.

This steepest fall in the company's share price in more than a decade leaves the company trading at a 38 per cent discount to its net assets, making the company a potential takeover target, reported Bloomberg.

One aspect fueling this speculation is the $12.4 billion cash and short-term investments held by Nokia, topping its market value of $8.6 billion. After accounting for debts, the company has a net cash position of $5.9 billion, or 68 per cent of its market capitalisation, according to data compiled by Bloomberg.

"Close to half of the market capitalisation is cash--that's cheap no matter what's going on," said Michael Mahoney, a managing director at investment advisor Falcon Point Capital. For private-equity firms, "it's cheap enough. When you are at this type of level, you don't even need to cut costs that much to get value out of the transaction."

While Samsung has been largely discounted as a possible bidder, Huawei, ZTE and Microsoft are being frequently mentioned as possible contenders. All have denied any interest or plans to make an offer.

Industry analysts reacted negatively to Nokia's announcements, and cut their price targets on the company's shares. At least ten brokerages slashed Nokia prices, with UBS telling Reuters: "Nokia's current profit warning worryingly reflects the company having to significantly discount its new Microsoft Lumia products in order for the eco-system to gain any traction with retailers, operators and consumers."

Canaccord Genuity analysts also lowered their price target on Nokia's U.S.-listed shares to $2.70 from $3.50, adding: "Due to our expectations for a continued sharp decline in Symbian smartphone sales...combined with a slow ramp in Windows smartphone volume...and continued mobile devices pricing pressure...2012 remains a challenging transitional year for Nokia."

To make a bad situation worse, ratings agency Moody's has downgraded Nokia's credit to junk status, claiming that the company's cash burn rate and pressure on earnings is higher than previously thought.

Moody's also cautioned that Nokia may have to contribute more funding to its infrastructure JV with Siemens if Nokia Siemens Networks' restructuring costs start to exceed its cash flow, according to the Wall Street Journal.

On a slightly brighter note, Moody's said Nokia's new range of Windows-based smartphones should get a boost by the launch of the new Windows 8 operating system, which is expected later this year. Also, Nokia's new low-cost touchscreen phones should support demand in emerging markets and raise average selling prices for Nokia's phones, Moody's said.

For more:
- see this Bloomberg article
- see this Financial Times (reg. req.)
- see this Reuters article
- see this Wall Street Journal (sub. req.)

Related Articles:
Nokia dismisses takeover speculation as shares rally
Nokia aims to regain emerging markets with new Asha touchscreen phones
Nokia unveils low-cost handsets to regain share in emerging markets
S&P: Nokia smartphone revenues could rebound by year's end
Nokia worries analysts with cash burn rate

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