Corporate Restructuring at Nokia - Essay Example

Nokia Table of Contents I. Introduction 3 II. Strategy Discussion 5 References 13 I. Introduction This paper discusses corporate restructuring at Nokia in the context of how that corporate restructuring resulted in the transformation of Nokias financial, production and market performance. The fulcrum of this transformation and restructuring for the purposes of this paper is the sale of the Services and Devices Unit of Nokia to Microsoft, for 5.44 billion euros or US $7.2 billion in cash, announced in September of 2013 and which is expected for consummation, after all background checks and regulatory checks from different countries around the world, by the beginning of 2014. The terms of the agreement are that Nokia will essentially transfer the whole of its Devices and Services business, which is the business division that makes Nokias cellular handsets, including all of the manufacturing facilities and more than 32,000 employees. This division is responsible for half of the total revenues of Nokia in 2012, and includes about 4,700 personnel who are based in Finland. That said, the deal does not include the portfolio of patents that Nokia has, which in essence will remain with Nokia, along with the Chief Office of Technology. This deal was approved by shareholders of Nokia in late 2013, and is touted by its leaders as the best alternative for the maximization of the value of the shareholders (Nokia 2013; Stoll 2014; Ricknas 2014; Microsoft 2013; Ando and Rigby 2013; Garside 2013; Shankland 2013; Easa 2014). The deal also includes the licensing of all of Nokias portfolio of patents in Nokias portfolio for a span of 10 years, but this will not be exclusive, meaning that Nokia reserves the right to license its patents to other parties, and to make use of the patents for its own product development and related business purposes. A substantial portion of the sale price, 1.65 billion euros, is for this patent deal, to which Microsoft has the option to extend after the decade-long agreement expires, and that extension privilege is indefinite in its extent in time. Part of the deal also licenses Nokias mapping platform HERE to Microsoft, over a period of four years, and this part of the deal is expected to generate revenues for Nokia equal to the amount of revenues that HERE generates within Nokia (Nokia 2013; Stoll 2014; Ricknas 2014; Microsoft 2013; Ando and Rigby 2013). The deal transforms Nokia into a company that was in financial trouble from the losses in its devices unit into a powerhouse of important patents in the telecoms space, as well as an important provider of telecommunications infrastructure in Nokia Siemens Networks or NSN as well as a provider of mapping technology in HERE. Of these three divisions, the patent arm is also expected to leverage the patent portfolio to develop new products and to further research into new technologies to continually renew that patent hoard for competitive advantage (Nokia 2013; Garside 2013; Shankland 2013; Easa 2014). The deal also transforms Nokia into a cash-rich technology company with significant income growth opportunities in new areas in infrastructure and in emerging technologies, with the profits from the sale transforming the company from a firm at risk of running out of cash into a company with a net cash hoard of 7.8 billion euros and a gross cash hoard of 11.4 billion euros. This, after the company also intends to take full control of NSN in order to fully capitalize on the income and growth opportunities in telecommunications infrastructure. In all, the sale is expected to generate a net book gain to the company of about 3.2 billion euros. The strengthening of its balance sheet and its cash position positions the firm to reinvent itself in essence and to chart a new course following the collapse of its devices business in recent years (Nokia 2013; Garside 2013; Shankland 2013; Easa 2014). II. Strategy Discussion One can argue that the strategy is a reactive strategy, done in order for Nokia to stay afloat in the midst of a collapse of its devices business and the shrinking of its once formidable position in the space, hammered down by competition that includes Apple and Samsung and arguably suffering from its bad platform bets by going with Microsoft and its unpopular Windows Phone software. On the other hand, using the Microsoft partnership as a starting point for the analysis and regarding that as the reality against which Nokia must craft a strategy, there is much sense in getting rid of a division that has been bleeding money and seemingly unable to get back its bearings. Having placed its bet on Windows Phone and throwing away its other smart phone platforms, and seeing little traction in that effort to boost its sales and its market share in devices, Nokia had few options to survive. Continuing on its present course would mean continued losses and the complete draining of its cash. Already the debt of the company had been relegated to junk status, meaning that it was in no position to get loan infusions to continue to finance its operations at rates that would allow it to gain profitability. Interest rate payments would continue to weigh down on any attempts at financial stability. On the other hand by making that clinical incision to rid itself of a money-draining unit, the company in one swift blow transforms itself from a company near death into a profitable and cash-healthy firm with good prospects moving forward. This necessary move is the prelude to a strategy where Nokia has taken stock of its core competencies and its unique advantages in the market and to choose to use those advantages to chart a new course, rather than sticking with the status quo and watching itself die slowly. At the heart of this pivot is its assessment that with the remaining assets after the sale, chiefly its patent hoard and its networking infrastructure and maps assets, Nokia has a range of revenue-generating assets that has no match in the industry (Shaughnessy 2013; Sahagian 2013; Soupporis 2013; Bekker 2013). One can dissect the total Nokia strategy in order to better understand how that grand strategy is in part not really a strategy in itself but rather is a move to prepare itself to pursue new strategies moving forward. One can say that the sale of the devices business of Nokia is a business decision that looked at the balance sheet and saw that there was no business case for continuing to make devices at a loss, when there are other opportunities within the portfolio that can be more profitable and will not result in Nokia becoming cash flow negative and bankrupt in the process. This is the prelude or the stepping stone to being able to craft new strategies and to go in new directions, or in other words to remake Nokia from what is left after the sale. For example, the strategy to take full control of NSN is predicated on a strong Nokia with a strong balance sheet and cash flow, and the devices business sale does fortify Nokias finances. On the other hand, looking at NSN itself and its moves since the decision to sell the Devices business, one can see that Nokia is on a path of horizontal integration in order to better leverage assets to achieve scale economies and to mitigate the high costs associated with investing in growing and competing in the networks infrastructure space for telecommunications. The move to take full control of NSN, for instance is a step in this direction, a move to fortify Nokias hold on the infrastructure firm and to cull the profits from that space. At the same time, one sees also that its more recent moves in the space, including its recent moves relating to Lucent and to Juniper Networks, can be seen as being in line with its chosen strategy of horizontal integration to strengthen its position in networking, fortify its technological capabilities in the space, enter into new technology areas in networking, and to realize scale economies. In the case of Juniper Networks, the planned purchase/merger with the firm which ended up being a partnership deal in the end is also in line with a horizontal integration strategy that seeks to use Junipers footprint in the United States to allow Nokia to likewise gain a better foothold in the important American network market (Nokia 2013b; Lawson 2013; Grundberg and Schechner 2013; Bazil 2013; Trefis Team 2014; Reuters 2014). Going into the details, the strategy of horizontal integration is evident in the considerations for the Nokias planned and eventually panned acquisition of Alcatel, which promised to fortify Nokias intellectual property portfolio with Alcatels portfolio, and which also promised to build enough scale in terms of total business to compete with the number one player in the space, which is Ericsson. As of last year Ericsson had a third of the global market for networking infrastructure, and the planned acquisition of the Alcatel by Nokia would have pushed the combined entity into the second largest by market share. What stopped the deal was not the soundness of the basic horizontal strategy and the foreseen benefits to Nokia of such a purchase in terms of fortifying its patent portfolio in networking and in acquiring scale economies, but rather business realities with regard to the challenges in operations and profitability on the part of Alcatel, which last year was dealing with restructuring challenges tied to financial problems. Fundamentally, from the point of view of the merits of the planned acquisition from the point of view of a horizontal integration strategy, the deal makes sense (Bazil 2013; Grundberg and Schechner 2013). The deal with Juniper Networks, on the other hand, is also in line with the horizontal integration strategy for Nokias networking division, aimed at gaining a foothold into American markets for network infrastructure, and partly to gain access to Junipers patent portfolio and knowledge of competing successfully in the American market. Again what held back an outright purchase of Juniper by Nokia is not the basic soundness of the horizontal integration strategy, aimed at fortifying the competitive position of Nokia in one of its core remaining business divisions, but rather the underlying financials of a merger, which was deemed risky and too expensive for Nokia to undertake. On the other hand, Junipers position in the US market and its unique portfolio of patents make a partnership, which is more financially viable, a very good proposition for Nokia (Trefis Team 2014; Reuters 2014). Meanwhile, its licensing and partnership agreement with Microsoft for its patents as well as for its HERE mapping technology can also be understood in terms of a horizontal integration strategy, where Nokia is able to capitalize and build a sustainable business out ifs rich patent hoard. In HERE on the other hand, the partnership deal allows Nokia to continue to enrich its HERE platform for its own product development purposes, and also to continue to realize new revenue streams for the mapping service, which it also licenses to many other parties besides Microsoft. The benefit of the horizontal strategy to strengthen the position of Nokia in the competitive mapping service space is in evidence here, because of the fact that the mapping service needs as many users as possible in order for the mapping service to continue to improve. Revenues on the service are dependent on the number of use cases for HERE, and the more people use it the more revenues Nokia generates, and the more useful and desirable the product becomes as well. The partnership with Microsoft for HERE maps guarantees that Nokia devices will continue to deliver the mapping service to hundreds of millions of users, enriching this mapping service ecosystem and making HERE relevant and potentially profitable moving forward (Nokia 2013; Rogowsky 2014; Charlton 2014). The non-exclusive nature of the partnership agreement and the licensing of the patents by Nokia to Microsoft, and the non-exclusive nature of the deal for HERE, underline the horizontal integration strategy and the wisdom of Nokia divesting itself of its devices business while retaining what amounts to the heart of the company, which is its intellectual property and related assets. From hereon that strategy is poised to buoy up Nokias financial prospects and to sustain its efforts to further build up its strong intellectual property position (Nokia 2013; Rogowsky 2014; Trefis Team 2014). References Ando, R. and Rigby, B. (2013). Microsoft swallows Nokias phone business for $7.2 billion. Reuters. [Online] Available from: http://in.reuters.com/article/2013/09/03/microsoft-nokia-idINDEE98202R20130903 [Accessed 17 March 2014] Bazil, M. (2013). Why Nokia Backed Off From the Alcatel-Lucent Deal. The Motley Fool. [Online] Available from: http://www.fool.com/investing/general/2013/11/26/why-nokia-backed-off-from-the-alcatel-lucent-deal.aspx [Accessed 17 March 2014] Bekker, S. (2013). Is Microsofts Nokia Strategy Working? Redmond Channel Partner. [Online] Available from: http://rcpmag.com/blogs/scott-bekker/2013/10/microsoft-nokia-strategy.aspx [Accessed 17 March 2014] Charlton, A. (2013).Beyond Nokia: How HERE Maps Will Go It Alone. International Business Times. 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Microsoft, Lucky Beneficiary Of Nokias Screwed Up Strategy. Forbes. [Online] Available from: http://www.forbes.com/sites/haydnshaughnessy/2013/09/03/microsoft-lucky-beneficiary-of-nokias-screwed-up-strategy/ [Accessed 17 March 2014] Soupporis, A. (2013). Tim Cook says Nokia died because it didnt innovate, Microsoft now copying Apples strategy. The Verge. [Online] Available from: http://www.theverge.com/2013/9/19/4747676/tim-cook-nokia-no-innovation-microsoft-copying-apple-strategy [Accessed 17 March 2014] Stoll, J. (2014). Nokias €5.4 Billion Sale to Microsoft on Track. The Wall Street Journal. [Online] Available from: http://online.wsj.com/news/articles/SB10001424052702304315004579383002503224472 [Accessed 17 March 2014] Trefis Team (2014). Nokia Rightly Chooses Partnering Over Merging With Juniper for US Push. Forbes. 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