Daniel Loeb/ Getty
After earlier dipping his toe into the high tech world with a somewhat pensive foray into Sony, Daniel Loeb’s Third Point investment fund has now gone further into tech and taken a position in Nokia, according to Third Point’s quarterly letter to its investors.
As we know Microsoft is buying Nokia’s mobile handset business, together with licensing rights for it to continue to use Nokia’s mobile patents, for a total of about US$7.5 billion. This is an all-cash transaction and the deal is expected to close early in 2014.
Afterwards a presumably rejuvenated, and certainly slimmed-down, Nokia will consist of just three remaining businesses; Nokia Siemens Networks (NSN), which will likely be re-named at some point down the road as Nokia earlier this summer bought out its’ partner Siemens’ 50% share; Nokia’s popular “HERE” maps division, and a huge mobile telephony patent portfolio known within Nokia as Advanced Technologies. The Nokia patents cover major chunks of 2G, 3G and 4G wireless communications technology and are licensed to a broad spectrum (no pun intended) of companies in the telecommunications business on a worldwide basis.
When the deal with Microsoft closes Nokia is expected to end up with a total of nearly US$11 billion of net cash on hand in its balance sheet.
According to Daniel Loeb at the purchase price he has recently paid for his Nokia position, which by the way in total is not yet disclosed, there was a major buying opportunity to participate in this “new” Nokia at a substantial discount to what the business may now be worth moving forward. In addition Loeb is hoping that a useful portion of the company’s large prospective cash position may be distributed back to shareholders, including Third Point, in up-coming quarters during 2014.
Whether by a share buyback or by a special dividend he probably doesn’t care, but he feels the prospect may now be an effective lure to draw additional new investors to Nokia as it continues to re-create itself. Future regular dividends would not hurt either according to Loeb, though much of Wall Street is often a touch schizophrenic about valuing tech firms that pay regular dividends, and don’t quite know what to do with them.
That is because funds management companies are often stratified between “growth” stock funds, which don’t expect their investments to ever pay dividends, and portfolios of more basic companies which may grow less but pay regular dividends instead. So when successful tech companies sometimes do both, famously such as Apple recently, there can be a strong element of potential identity confusion. “All they have is cash” can be a stinging indictment in the investment industry at times.
According to Loeb, since about 40% of Nokia’s current market capitalization can be attributed to its pro forma cash position once the sale to Microsoft goes through, he believes this could well undervalue the three remaining operating businesses, all of which are distinct, valuable and he states generate positive cash flows.
With respect to NSN, Loeb believes years of difficult restructuring may have finally led to a more profitable underlying business, while its market position has improved ready for an upcoming global 4G telecommunications upgrade cycle. Having bought out Siemens’ 50% stake in NSN likely for cheap when Siemens bailed out last summer, Nokia now at least has the chance to do well with it if it executes well.
Third Point points out that Nokia’s mapping business HERE is of high quality and appreciated by its customers. With a reported 80% position in built in automotive navigation markets it may also have good chances on mobile as well, though obviously Google and Apple are going to attack the auto business for a piece of it themselves as well, so it may not be a one way street.
Finally Loeb correctly states that Nokia’s Advanced Technologies intellectual property licensing business will be able to operate as its own profit centre, unencumbered moving forward by the historical netting arrangements it used to make with other hand set makers.
Nokia has over 10, 000 patent families in its IP portfolio, including leadership positions in 2G/3G/4G standards essential patents, as well as a broad array of non-standard essential patents. Furthermore Nokia is likely in a much stronger and more central position to profit from them than Motorola, in strong contrast, has been able to do either before, when it was independent, or since being acquired by Google as Motorola’s patents were known to be weak and so it has so far proven with poor results in the courts in the cases it has brought so far.
In contrast, Daniel Loeb points out that Nokia’s patent portfolio has been successfully defended in courts everywhere and via settlement agreements over the years, which enhances its likely future licensing prospects and intrinsic strategic value – particularly we can add for its non standards essential patents which are potentially very lucrative as they permit differentiation and carry no obligatory licensing commitments on FRAND terms (FRAND stands for fair, reasonable and non-discriminatory).
The essence of Loeb’s decision-making for acquiring the shares now therefore he describes as being that the repositioning of the “new” Nokia story will take time for the broader investment community to absorb, which has allowed him to initiate his position at what he considers to be a significant discount to its true value.
It is always useful, as well as quite unusual, to see the thinking of a major investor laid out in such a carefully reasoned way. After all he is giving plenty of ammunition to his critics if it should turn out to be nonsense. “Talking your book” though is of course also not unknown in this business, however, and only time will tell us if he is right.