A Slimmer Nokia Might Better Compete With Huawei

(Bloomberg Opinion) -- The prospect is tantalizing: the Boeing Co. versus Airbus SE battle, but for the 5G era.

Nokia Oyj, the Finnish telecommunications equipment firm, is contemplating asset sales and merger options, Bloomberg News reported on Wednesday. That raises the prospect of joining forces with Swedish rival Ericsson AB, thereby creating a European behemoth to compete more effectively with China’s Huawei Technologies Co.

A tie-up would echo Europe’s cobbling together of Airbus in the 1960s and 1970s as a rival to U.S. aircraft-making giants like Boeing, setting up a fiercely contested duopoly that has dominated global aviation ever since. Unfortunately, it would also be a strategic misstep. Asset sales are the far more sensible option.

Merging the two Nordic companies would most likely create as many problems as it would solve. Nokia has endured a tumultuous 12 months — the shares fell 25% in October after cutting its outlook — in part because of the failure to effectively integrate its last major acquisition, the $18 billion takeover of Alcatel-Lucent SA.

Combining with Ericsson would make it easier to compete on price with Huawei, which benefits from the economies of scale afforded by the massive Chinese market, but it could also require several years just to secure regulatory approval, let alone integrate the operations. That would be a boon to Huawei, which could capitalize on the period of uncertainty to secure new customers.

Crucially, Finland, which is one of Nokia’s five-biggest shareholders through its Solidium Oy investment vehicle, would surely stand in the way of any merger that would eliminate a lot of jobs.

An acquisition by Cisco Systems Inc. would satisfy President Donald Trump’s exhortations for the U.S. to build a giant in fifth-generation wireless technology, pairing the San Jose, California-based company’s core network savvy with Nokia’s expertise in wireless communications. But it would be foolish of Cisco to tap its sizable cash pile for a deal that would dilute its margins; it enjoyed net profit representing 24% of sales last year, compared with Nokia’s 2.1%.

QuicktakeHow Huawei Landed at the Center of Global Tech Tussle

Nokia’s substandard 5G offering means Chief Executive Officer Rajeev Suri has been unable to profit on the tribulations of Huawei, and its shares have lost a third of their value over the past year. That downturn in fortunes makes it vulnerable to an approach from an activist investor scrutinizing businesses that are undervalued as part of the whole.

Nokia can get ahead of that threat by putting some assets on the chopping block. Its intellectual property arm would seem the prime candidate: the division still generates healthy profits — it has a 98% gross profit margin on sales of 1.5 billion euros ($1.6 billion) — but the value of the portfolio is deteriorating steadily. Nokia could sell much of it for a lucrative sum — those parts pertaining to its old handset business, for example — while retaining the most recent patents developed for 5G. The fixed-access business, which has endured the steepest sales drop-off, might also be a candidate, according to Bloomberg Intelligence analyst John Butler.

The review of options may yet come to nothing, as my Bloomberg News colleagues reported. But the last thing Suri needs is the unhelpful distraction of an activist calling for changes as he plays catch-up in 5G. It would be far better to be proactive himself.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

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