Nokia's Microsoft tie-up gets renewed hammering

HELSINKI/BARCELONA (Reuters) - Nokia’s already battered shares fell further on Monday as analysts slammed its all-or-nothing Microsoft deal for being badly planned and failing to answer questions on developing smartphones.

Nokia chief executive Stephen Elop welcomes Microsoft chief executive Steve Ballmer with a handshake at a Nokia event in London, February 11, 2011. REUTERS/Luke MacGregor

New CEO Stephen Elop announced the software tie-up with Microsoft on Friday, but the mainstay of his much-anticipated strategy revamp failed to restore investor confidence in Nokia.

Under the partnership, which Elop said was worth billions, Nokia will adopt Windows Phone software across its devices, replacing its home-grown Symbian platform and turning the world’s largest cellphone maker into a pure hardware player.

Nomura analysts responded to Elop likening the plan to leaping from a burning platform, by warning: “It’s a long way down” and said the fact that Nokia could not give a 2011 outlook made the stock “hard to own” over the next 12 months.

Nokia stock was down 4.1 percent at 6.715 euros by 1429 GMT on a flurry of analyst downgrades. The shares are down 20 percent since the middle of last week when news of the deal leaked, hitting a six-month low.

“The chief executive will suffer from a lack of credibility among investors for a long time, fixing that will be a major task,” Swedbank analyst Jari Honko said.

In some of the first reaction to the deal from competitors, Research In Motion co-CEO Jim Balsillie said it did not change the game, but conceded that the market was difficult.

“I wish them well in what they do and they’re both very very good companies, but our strategy is our strategy...It doesn’t change what we do,” Balsillie said.

“We feel good about our future but it’s never been more turbulent, it’s never been busier, it’s never been more demanding,” the RIM co-CEO added.

Some technology analysts said Nokia faced a short-term collapse of consumer demand for its Symbian-based phones which would eat into margins -- the phones currently make up around half of Nokia’s devices sales.

Choosing a full swap out for Microsoft makes Nokia similar to personal computer makers like Dell, whose shares are valued at far lower multiples than smartphone companies.

Before the Microsoft deal was confirmed Nokia shares traded at 13.4 times expected 2011 earnings, below Apple’s 19.3 times but ahead of Dell’s 9.2 times multiple. At Dell’s valuation, Nokia shares would be worth 5.61 euros.

“We expect Nokia’s smartphone market share to collapse as developers abandon Symbian support following Elop’s dismissive comments about Symbian and Qt software platforms,” Tero Kuittinen, analyst at MKM Partners, said.


Analysts were also concerned that Nokia had failed to answer questions about the development of new smartphone models.

“I believe Nokia’s smartphone sales will go down by some 20 percent for the rest of the year. They will lose a lot of market share,” said Nordea analyst Sami Sarkamies, adding that the alliance could prove to be succesful in long term.

Nokia has already lost major market share on high-margin smartphones to Apple’s iPhone and products based on Google Inc’s Android platform.

“We have lowered our Nokia smart-phone forecasts for 2011 by 7 percent and we are concerned by both the lack of preparation the industry/employees appear to have had,” UBS analyst Gareth Jenkins said.

Others pointed out that Microsoft’s experience in the mobile phone market did not bode well.

“Nokia is...handing responsibility for its user interface to Microsoft, which has a poor track record in this area, and giving access to its innovations to key rivals,” said Stuart Jeffrey at Nomura in a research note.

Many analysts believe that smartphone makers such as Samsung, HTC or Sony Ericsson will now embrace Google’s Android more deeply, fearing they can no longer compete with Nokia on Windows Phone.

“Is Nokia forced to pay as much as we do? Apparently they are not,” Bert Nordberg, chief of Sony Ericsson, told Reuters in an interview.

Microsoft insisted its collaboration with Nokia would help rival phone makers, not threaten them, according to the software giant’s president of mobile.

Andy Lees told Reuters in Barcelona that the vote of confidence from Nokia, which sold 100 million smartphones last year, would encourage developers to create applications for Windows Phone, aiding all cellphone makers using the platform.

Additional reporting by Tarmo Virki and Matt Cowan in BARCELONA; writing by Sophie Walker and Alexander Smith; editing by Sophie Walker