I guess it was inevitable. Nokia Corp. announces that it will sell its handset business to Microsoft Corp. for €5.4-billion. The sale will boost the Finnish company's cash reserves to about €8-billion. Then – wham! – a hedge fund shows up and says: I'll take some of that, please.
On Tuesday, Daniel Loeb, the founder and boss of Third Point, the $14-billlion (U.S.) activist fund that has taken runs at Yahoo Inc. and Sony Corp., revealed that the fund had taken a stake in Nokia and expects the company to distribute a "meaningful portion" of the handset proceeds to shareholders "in coming quarters."
Nokia has not responded, but we can assume that Mr. Loeb will get some or most of the goodies on his wish list. Nokia has a long and inglorious history of buying back its own shares, all the better to pump-up the value of its lavish executive stock-option plans, even as its fortunes slide. Earlier this year, the board authorized the purchase of up to 370-million Nokia shares (though the number authorized and the amount actually purchased can vary considerably).
Nokia should resist Mr. Loeb and his ilk. Shorn of its handset business, the company desperately needs to reinvent itself if it is to survive as Scandiavia's premier technology company, or just plain survive. A Nokia drained of financial resources will have less flexibility to make acquisitions, fund R&D programs and retrain employees.
Share buybacks and special dividends are the time-honoured ways of returning "excess" cash to shareholders. Buybacks have been especially popular among American companies, less so among European ones, though a few, like Nokia, have drunk the pay-out Kool-Aid with abandon. From 2001 through 2012, the S&P 500 companies alone spent $3.5-trillion on buybacks, and that excludes the Nasdaq names (my next column in Report on Business Magazine, out Friday, delves into the buyback disease in detail).
Buybacks (and one-off dividend payments) are a legal form of stock-price manipulation that were severely restricted by the U.S. Securities and Exchange Commission before the 1980s. Now, any company can fund buybacks in virtually any amount at any time. Their popularity, of course, has climbed with the popularity of stock options plans.
The problem with buybacks is that they, by definition, drain financial resources from a company and are often done when companies need to preserve resources to make themselves more competitive. Incredibly, BlackBerry Ltd. bought back billions of dollars of its shares after Apple Inc. launched the iPhone. Wouldn't that loot have been put to better use launching new mobile devices to compete with the iPhone?
Ditto Nokia. Before the iPhone was launched in 2007, it was the dominant player in the global mobile business. But through a deadly combination of arrogance and dumb-assery, it let it all slip away. Buybacks were part of the problem. It should have been investing lavishly in killer products, not funneling money to investors in a (vain) attempt to keep the share price up. The shares have lost 57 per cent in five years.
For its sins, Nokia is being driven out of the handset business; Microsoft will soon be that division's new buyer. The shrunken Nokia will focus on three businesses: Nokia Solutions and Networks, the division that makes data networking and telecoms equipment; the HERE maps business; and a portfolio of patented technologies.
Nokia Solutions and Networks is the biggie, and its future is uncertain. Until early this year Siemens, Germany's biggest engineering company, was Nokia's partner in this business (then called Nokia Siemens Networks). It decided to get out, selling its half stake to Nokia. You can imagine that Siemens would have offered to buy out Nokia if it thought the business had a strong future.
Nokia needs to reinvent itself. Paying off hedge funds is a bad way to start that process.
Eric Reguly