Nokia’s Alleged Fight against a Hostile Takeover Illustrates the Bumpy Road Ahead

Since Nokia’s announcement of the financial results of Q3 2019 in October 2019, the Finish network infrastructure vendor has found itself in a challenging situation. While the company reported net sales of EU€5.7 billion—or US$6.28 billion, corresponding to a 3.6% Quarter on Quarter (QoQ) increase—it also announced a pause in paying dividends to its shareholders to increase the company’s cash flow in order to cope with necessary investments into 5G technology, which proved to be more costly than expected. As a result of this decision and the lowering of 2019 and 2020 outlooks, share price dropped dramatically by 23% within the same day.

This sharp fall gave rise to several speculations on how Nokia will cope in challenging year 2020, with the current health care emergency around COVID-19 exacerbating the situation even further.

On April 17, 2020, the discussion about Nokia’s future experienced a new turn, since a TMT Finance report claimed that Nokia had employed investment banking partner Citibank to defend itself from a hostile takeover bid for parts or all of its business. Last week’s development shows that waters will not calm, and Nokia will face a turbulent remainder of the year.

With the rising competition from Webscale companies—like Amazon Web Services (AWS), Microsoft, Google, and the like—Nokia’s current situation serves as perfect illustration of the difficult situation that network infrastructure vendors find themselves in. Therefore, the whole telco industry should consider the different scenarios that Nokia could face and their impact on the telco industry and cellular network deployment as a whole.

There are essentially two possible scenarios that Nokia could face:

1. Best Case: Nokia gets industry support to proceed as planned in the market. Subject to the exact arrangements, this could even strengthen Nokia’s value proposition. By, for, example partnering up with web scale companies (like AWS), Nokia could combine its telco deployment know-how with the experience in edge and cloud infrastructure of the likes of AWS. It also in the best interest of mobile operators and the whole industry to have more competition in the market, especially given the priority of the U.S. government to move away from Chinese vendors. Both mobile operators and many governments could help Nokia by means of financial aid or other stimulus.

1. Not Great, Not Terrible: Nokia gets acquired by another vendor in an adjacent value chain position. These could well be cloud giants, e.g., Amazon or Microsoft, which are also moving into the edge computing space. An acquisition of Nokia could make these companies enterprise vertical End-to-End (E2E) technology suppliers.

1. Worst Case: Nokia gets acquired by a capital investment firm. Given that capital investment firms are, first and foremost, motivated by getting return on their own investments, the strategic interests of the acquired company are of secondary importance; following the path of which they would recapitalize Nokia, identifying the most profitable business units to sell to anyone bidding. As capital investment firms typically aim to recapitalize enterprises within five to seven years to then be able to resell, they predominantly look at short-term measures to increase profitability. While profitable business units like Radio Access Network (RAN) or the comparatively young enterprise division would. In short, Nokia in its current form would not survive and would eventually disappear from the market.

While the first scenario could potentially strengthen Nokia’s value proposition, a situation in which Nokia as an independent network infrastructure vendor disappears is not desirable for anyone within the telco industry for a number of reasons:

In the current geopolitical climate, and considering the skepticism towards Chinese infrastructure vendors, the disappearance of Nokia would result in a quasi-monopoly for current competitor Ericsson. As the ecosystem behind open source initiatives like OpenRAN are not mature enough yet, OpenRAN vendors will not be able to fill this gap. This quasi-monopoly inevitably leads to an increase in prices faced by network operators because of the missing downward pricing pressure.

One could argue that such a quasi-monopoly would be beneficial for remaining infrastructure vendors, like Ericsson; charging higher prices would enable them to generate larger profits. Even though this is true in theory, in a real-life scenario, such a situation could backfire at remaining infra vendors. To understand the implications of such a market distortion, consider the example: as a result of the current uncertainty about Huawei’s involvement in Western European and North American mobile network deployment projects, Deutsche Telekom just recently announced a halt in all their 5G deployment projects until there is clarity about the permitted involvement of Chinese Huawei in 5G network deployment. A changing vendor landscape (leading to a quasi-monopoly) would therefore slow down the overall deployment of 5G networks, which of course would harm remaining infra vendors in the long run.

Furthermore, a disappearance would result in the industry loosing valuable experience and know-how in telco cloud development and network virtualization. As one of the key drivers behind enterprise cellular networks, the disappearance of Nokia would also slow down enterprise 5G.

Seeing that a market without Nokia would be harmful to the whole telco industry, it should be in the interest of infrastructure vendors, network operators, and advocates of enterprise mobile networks to help Nokia survive in the market.

From an economist game theory point of view, however, this is a classical prisoners dilemma situation, described in the following way:

1. Financially supporting Nokia would incur some short-term costs to the party that decides to back Nokia
2. The whole telco industry would benefit from the survival of Nokia
3. As a consequence of (2) each individual stakeholder in the telco industry has an incentive to wait for the other party to back Nokia
4. Since every stakeholder adopts a “wait for the others” approach, we would end up in a situation in which none of the Telco industry players decide to back Nokia, which would make Nokia vulnerable to capital investors and therefore result in Nokia disappearing from the market (even this is not in any telco industry actor’s interest)

The aim of this brief journey into the art of economic modelling using game theory is to show that, even though the telco industry generally agrees on its preference to help Nokia survive in the market, this is by no means the guaranteed outcome. To overcome this, network operators, as well as other infrastructure vendors, should understand any supportive partnership as a joint effort and should investigate ways to distribute the short-term costs associated with helping Nokia survive between network operators as well as infrastructure vendors.

For network operators, this could include paying in advance for deployment projects. Other infrastructure vendors could consider partnering with Nokia in very well-defined markets (either geographically, or vertical markets) as a joint venture or a memorandum of understanding. Furthermore, the telco industry could consider strategic investment into Nokia to prevent capital investment firms from taking over Nokia. Either way, the industry needs to bear in mind that Nokia is subject to the shareholder’s confidence, and the capital market is not well known for its patience. Therefore, network operators and infrastructure vendors need to understand the urgency of the situation now to develop a durable strategy, based on the possible measures just discussed.