Tuesday, June 07, 2011

Breaking Up Nokia?

Bloomberg BusinessWeek has conducted an interesting sum-of-the-parts analysis of Nokia.  The magazine argues that Nokia is worth more apart than it is together. Specifically, Bloomberg attempted to value the three major units of Nokia:  mobile phones, mapping systems, and infrastructure equipment.  It chose one comparable firm for each unit, and then valued the units based on the revenue multiples of the comparables.  The conclusion: Nokia's sum-of-the-parts may be worth 52% more than the whole! 

What should we make of this analysis?   I think it's certainly advisable for investors and executives to be looking at whether Nokia might be worth more in a break-up.  However, I have some concerns with concluding that the sum of the parts exceed the value of the current whole based on this methodology.   First, I would like to have seen some other valuation methods besides revenue multiples.  One wonders how much the numbers shift based on different valuation techniques.  Revenue multiples seem particularly troublesome here since the mobile phone unit seems in serious distress, with market share plummeting over the past few years as the smartphone business has been dominated by rivals such as Android and Apple. 

Second, the methodology only chooses one comparable for each Nokia business unit.  I would much rather see a set of comparables for each unit, with an average taken of the revenue or earnings multiples for those rivals. 

Third, sum-of-the-parts analyses can be a bit dangerous if significant synergies exist among the units, and if those synergies might be lost during a break-up.  I don't know enough about the intricacies of Nokia's business to determine the extent of synergies; the article at BusinessWeek.com does not mention synergies at all.  

Finally, the rapid significant decline in the mobile phone business at Nokia really does make valuation a challenge.  Projecting forward based on history can be difficult based on the deterioration happening in the business.  As one expert noted in the article, "“It’s hard to do a sum-of-the-parts analysis when the floor is falling out and you don’t know where the bottom is.” (Michael Liss, fund manager at American Century) 

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