Friday, April 17, 2020

Rumors of Nokia facing hostile takeover bid: skepticism is warranted and competition enforcement can't wait

Nokia's stock price went up yesterday after a TMT Finance report said the company had hired Citi to fend off a hostile takeover bid from an unnamed U.S. private equity fund. The rumored bid could relate to the company as a whole or to specific assets. Nokia declined to comment.

Let's take a quick look at two questions:

I haven't formed an opinion on the reliability of TMT Finance. That website may indeed have scooped all other media on this one.

Richard Kramer of Arete Research, a 20-year-old and highly specialized, independent analyst firm headquartered in London, wrote in a note to his firm's clients that "Nokia is sure to deflect this unwanted attention on multiple grounds." Mr. Kramer then points to Nokia's ownership structure: "Its largest shareholders are local Finnish pensions funds, who are unlikely to just want to cash in." (That's also my impression as I've had conversations with Nokia shareholders on various occasions, and they were all Finnish pension funds.) Nokia shareholders may not be happy with the fact that the company's shares are "down a third on a [12-month] view," but in Mr. Kramer's opinion "this reflects poor execution that [private equity] is not going to resolve quickly, and a messy, protracted effort to buy out an €18bn market cap company would be highly unwelcome with all the other issues a new CEO faces, so we see this as much more of a negative distraction than a signal of underlying value."

That makes sense to me, and I can only add something when it's clearer what the proposed deal structure would look like.

On the antitrust side, this rumor is no reason to delay anything. Much to the contrary, there is a risk of a buyout like this resulting in even more aggressive enforcement. For an example, Nokia's management might want to coerce a number of companies into license deals just to demonstrate to shareholders that this is a stock worth holding on to. If the deal happened, the new owners might ratchet up patent enforcement, or they might sell some or all of Nokia's patents to trolls (a practice called privateering, which Nokia has already engaged in to a large extent).

Cellular SEP licensing is of great concern not only to smartphone and car makers, but also to the wider Internet of Things (IoT) industry. Many (European) companies might face outsized royalty demands, and with most of them being rather small, they actually depend on their suppliers (such as chipmakers) having secured the relevant licenses.

Honest and consistent competition enforcement is always the best choice. Once an antitrust authority allows itself to be swayed by what's going on in the world of corporate finance, there's an increased risk of making bad decisions. There's always going to be some kind of volatility, and buyout offers are one typical imponderability. But what the EU should focus on is what its highest court decided in Huawei v. ZTE (in terms of everyone's access to a FRAND license), and take a principled stance. Next time, the SEP holder in question may not be European: European companies hold fewer than one in six 5G declared-essential patents.

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