A mysterious rally in Nokia's stock could mean that a new 5G challenger to Huawei is coming
On Wednesday, despite a global stock market sell-off related to the spreading coronavirus, the shares of Nokia soared as much as 6.1% higher. What prompted the rally was a rumor that the company was considering a merger with rival Ericsson or another company. Nokia is no longer a handset manufacturer having licensed that business to HMD Global. Now, the company is one of the top providers of networking equipment in the world after Huawei.
The top four suppliers of networking gear globally include Huawei, Nokia, Ericsson, and ZTE. Because of Huawei's close ties to the communist Chinese government, the U.S. has banned the use of its equipment on stateside 5G networks. It also has asked allies not to use the Chinese manufacturer's gear on their own 5G networks although some allies like Germany and Britain have failed to listen. As British Prime Minister Boris Johnson wondered, "What are the alternatives?" Unfortunately, there aren't too many.
Is some company about to buy Nokia?
Nokia and Ericsson's technology is about 12 to 18 months behind Huawei's and the latter's connections with China's state-run banks allow it to offer customers generous financial terms. The U.S. would love to help create a company that would compete with Huawei. Back in October, there was a report claiming that the U.S. had approached Cisco and Oracle and asked them to challenge Huawei, but both declined to spend the time or money.
One company that is rumored to be interested in Nokia is Ericsson
One idea that came from Attorney General William Barr called for the U.S. to purchase controlling stakes in Nokia and Ericsson. But Vice President Mike Pence and White House economic adviser Lawrence Kudlow both shot down that idea. So the unusual rally in Nokia shares Wednesday ended up credited to the rumor of a possible merger between Ericsson and Nokia. A merger between two Scandanavian networkers is a lot easier to get through local regulators than getting global regulators to approve a merger involving a sovereign country and a foreign company. Or is it? With the small number of companies in the networking market, a merger between two of the top four firms still might be hard to accomplish. Just ask T-Mobile and Sprint.
Meanwhile, Nokia told Reuters that there is no truth about a possible merger with Ericsson. Most analysts don't believe that such a merger is in the works anyway. J.P. Morgan analyst Sandeep Deshpande said that a possible merger with Samsung is "more likely but not substantially so," because most western governments want more options to challenge Huawei, not fewer choices. The analyst says U.S. firms like Apple and Cisco would be obvious choices to buy Nokia, but the company's margins are so low that he doesn't think that big firms would have any interest in a deal. Instead, Deshpande says, "a smaller U.S. technology company exposed to government contracts could have interest,(but)...we cannot identify an obvious acquirer." Right away we'd guess that Apple is not interested; Nokia's $22 billion valuation doesn't meet the MO of a traditional Apple deal. The latter is known for buying smaller companies and the largest purchase it ever made was the $3 billion acquisition of Beats Audio.
Barclays analyst Andrew Gardiner says that instead of a merger, the stock price rally could simply foreshadow an asset sale that Nokia could be working on. A possible transaction with Ericsson is a "non-starter" he says and calls an asset sale "more plausible, but perhaps not imminent." Lastly, Citi's Amit Harchandani told clients in a note that Nokia could be the target of an acquisition with a U.S. buyer. He calls a Nokia-Ericsson combination "highly unlikely, due to a combination of strategic, financial, cultural and regulatory considerations."
On Thursday, the day after Nokia's stock showed unusual strength and traded as high as $4.23, the shares dropped back to close at $3.96 and they closed today at $3.87. Stocks that show unusual strength in the face of a major sell-off often have some big news working in the background. Whatever that big news is, it could have repercussions on how the U.S. and its allies skate around the largest supplier of networking equipment in the world, which is Huawei.
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