There is no shortage of information about what happens to companies in distress. The cause of distress varies widely and is often not well understood but the actions and symptoms of distress are very consistent. We can look at examples in each industry, even in each product category for a rich set of distressed company data.
For over a year I’ve been chronicling the decline of incumbents in the mobile phone industry. However, decline cannot continue indefinitely. At some point a company “exits” the industry. Either through a sale or divestiture or, rarely, bankruptcy. The list of exits is already long. The length and the correlation between exit and the lack of recovery implies that Nokia will also exit.
But how, exactly?
Will Nokia be acquired? If so, then by whom? What other options exist? How can we analyse this?
The easiest way to guess is to look at what happened to other companies in similar circumstances. The clearest and easiest comparison to apply is Motorola. Motorola was at one time the largest phone vendor and it went through a violent decline.
Like Nokia, it was diversified into networks and a few other businesses. Unlike Motorola it’s not an American company. This matters because American companies are more comfortable targets for corporate raiders. The legal and boardroom mechanics are not “better” or “easier” in the US than in Europe but they are more familiar to those who might engage in it.
So one avenue that Motorola travelled on was the intervention of activist investors who forced management change, affected strategy and pushed some tactical initiatives. This external pressure was successful in the case of Motorola. The company was split up, it was re-purposed and re-focused and, with a bit of good luck, was acquired.
The process however still took two years. In that time the company languished but stayed alive. Its headcount was reduced by nearly two-thirds. It was in a precarious situation throughout. Its story is not over but ownership did change hands and those who took a risk with it while in distress managed to get a reward.
This example (and Sony’s acquisition of Sony Ericsson and HP’s acquisition of Palm) cannot apply to Nokia. An activist investor is unlikely and the company has not yet made itself attractive to a buyer. So what would Nokia need to do to be acquired?
The first step toward an acquisition will be divestiture of its Nokia Siemens venture. The second will be a spin-off or sale of its non-smartphone division. The third might be the allocation of its intellectual property across these separate entities or in a separate holding.
As the company is broken up, value can be released. Investors will be able to value it better and make appropriate assessments of risk. Only at this point would an acquirer perhaps buy the “rump” Nokia smartphones group.
However, even this scenario is not without huge risks. By the time the split is completed, the operating companies could have deteriorated to such a degree that they are no longer viable. Timing is critical.
So if the smartphone group is isolated and made available, who could buy it? Microsoft is always cited as the primary buyer. I’ve been sceptical of this as Microsoft has found it difficult to make hardware work. It acquired Danger leading to Kin which failed. It has struggled with Xbox for a decade and has yet to recover all its costs for the effort. It has failed embarrassingly with Zune. It also has shown no particular success with its original Surface table computer.
But management has re-committed itself to a new hardware effort with the new Surface. This renewed potential opens up the possibility of entering into the integration of a phone again into their business, and Nokia would be remarkably well positioned to help.
At this time, the possibility still seems remote. The company has dismissed again and again speculation of building phones. Unlike PCs, the phone platform is not yet mature and volumes and distribution are very different.
However, there is one other option.
Microsoft has historically “rescued” technology companies in distress with cash infusions for minority equity stakes. It injected some cash into Apple, Barnes & Noble and even Facebook. It did so not because they wanted to own these companies but because they wanted them to survive or thrive. The move acts as a signal to the industry, partners and developers. So what I see more likely than an acquisition is Microsoft capitalising a spun-off Nokia Smartphones company in exchange for a small equity stake.
The valuation of this stake will be huge as I expect billions of dollars for single-digit share ownership. However, Microsoft would not be doing it to get a return from those shares. It would probably later sell them at a loss. But it would be buying a strategic option whose value may be far greater.
Horace Dediu is founder and managing director of Asymco, a Helsinki-based app developer/industry analysis advisory firm. You can find his blog here.