1. Nokia-Siemens Networks
Nokia recently announced that it will pay $2.2 billion to buy Siemens AG (ADR) (NYSE:SI)‘ stake in the Nokia-Siemens joint venture. This will give the company full control of the 50-50 venture. The early phase of NSN was riddled with financial troubles and many analysts doubted if the venture would ever show a clean pair of heels. Lately, however, NSN has begun generating cash and is showing clearer signs of financial stability, helped by its sharp focus on mobile broadband. Nokia will pay Siemens AG (ADR) (NYSE:SI) $1.56 billion in cash and the rest as a secured loan to be paid one year after the deal is actualized.
Nokia’s detractors have raised a furor on the move questioning the effects it will have on Nokia’s already stretched cash flow (cash burn rate in Q1 2013 came in at a blistering $760.5 million).
Although these concerns are genuine, what’s even more important is the cash generation qualities of NSN. We can expect to see operating profits for the coming quarter (Q1 2013 Operating Cash Flow less Investing Activities stood at $310.7 million).
2. Microsoft deal
There are ongoing rumors that Microsoft Corporation (NASDAQ:MSFT) is considering buying out Nokia’s phone unit. Microsoft is a respected software titan, but a newcomer in the hardware business with its Surface Tablet. Microsoft Corporation (NASDAQ:MSFT)’s modus operandi has always been to partner with hardware manufacturers such as Nokia and have them install their software on their devices.
Although the rumored deal between Nokia Corporation (ADR) (NYSE:NOK) and Microsoft Corporation (NASDAQ:MSFT) is quite unlikely at this point, it is likely to be beneficial for both companies if it actually materializes. Microsoft will get an entry-point into the lucrative smartphone market while Nokia can use the Windows Phone 8 OS to get a respectable market share in the business.
Nokia’s achilles heel
With so much good news invariably comes a little bad news. Nokia’s tight liquidity is a major area of concern for investors. The company burnt through $760.5 million in cash last quarter and has near-term cash outflows in excess of near-term inflows (negative working capital). Accrued expenses currently stand at 110% of revenue (compare that to Apple’s 30% or BlackBerry’s 62%).
Nokia’s weak cash position might force the company to make a rights issue in a bid to raise cash to finance its operations. This is a near-term risk for Nokia.
Looking forward
Although Nokia’s poor cash position needs to be addressed in a hurry by its management, investors need not lose sleep over it since it is to be expected from a company just beginning to recover from a traumatic trading period and looking to expand its market share. As such, keep an eye on Nokia Corporation (ADR) (NYSE:NOK).
The article Time to Buy Nokia’s Promising Future originally appeared on Fool.com and is written by Muhammad Bazil.
Muhammad Bazil has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Muhammad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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