Nokia Corp.; market cap as of 29/04/16: €29.746bn

Introduction

On April 26, Finland-based Nokia announced plans to acquire France-headquartered healthcare wearables devices manufacturer Withings S.A. in a €170m cash deal. The transaction comes as Nokia seeks to make a consumer-focused comeback, prompted by slowing sales in its network equipment business. Also, the move displays a renewed attitude of the Finnish Company in addressing the new needs of its customers, more and more skewed towards the fast growing market of the “Internet of Things”.

About Nokia Corp.

Nokia is a Finland-based telecom-network equipment manufacturer, operating in approximately 130 countries, with $12.49bn in yearly revenues as of 2015. From the mid-90s forward, Nokia was a global company with a world leadership in mobile phones, until smartphones manufacturers began to acquire a significant portion of Nokia’s market share, in the mid-00s. As a consequence, Microsoft acquired Nokia’s mobile device business in a €5.4bn transaction in 2013. Thereafter, Nokia devoted its attention to its telecom business, a focus which led to the 2015 acquisition of Alcatel-Lucent S.A. in a €15.6bn transaction. Since then the Company has been expanding its networking gear business, with a particular focus on developing 5G technology. Currently, the Company is organized in five business groups: Mobile Networks, Fixed Networks, IP/Optical Networks, Applications & Analytics, and Nokia Technologies. The latter of these represents an important source of revenues for Nokia due to the licensing of its patents, which are significant for the mobile phone market.

About Withings S.A.

Withings is a France-based digital health was founded in 2008, with offices in France, US, and Hong Kong. After its inception the Company has expanded its devices offering to include activity trackers, connected security cameras, thermometers, blood pressure monitors, and so on. Moreover, Withings’ devices are complemented by a set of more than a hundred compatible apps, created by third party developers. The Company does not disclose financial information, but it claims it rose €23.5m in 2013. Withings investors include 360 Capital Partners, BPI France, ID Invest Partners, and Ventech.

Internet of Things Industry

The wearable technology and Internet of Things industry is a fast growing new industry. According to IHS Technology, wearable consumer devices sales will amount to $19bn by 2019, a threefold increase over 2013 level. Moreover, specialized reports show that within the industry there is a large potential for healthcare devices that has not yet been thoroughly taped into, making the segment a ripe target for established tech companies and new comers alike. Some of the already well-known products include Apple Inc.’s Apple Watch as well as Fitbit Inc.’s devices. Nevertheless, the industry still has a long way to go since many potential consumers have concerns about their data’s privacy and the current costs of healthcare wearables. On the upside, employers and health insurance companies have been buying devices to encourage a healthier lifestyle for its employees and insurance clients, respectively.

Furthermore, the industry presents a highly competitive landscape, where companies like Apple Inc. compete on the higher end of the cost spectrum, and others like Chinese company Xiaomi Corp. are involved in the lower end. Some of the most popular companies, however, compete in the interval set by these extremes, including Fitibit Inc., Withings S.A., amongst others. Usually companies which compete at the middle of the spectrum are facing lower margins, and some of them are looking for differentiation strategies to keep their competitive edge. Also in light of these last observations, Withings’ sale to Nokia seems to be a positive move as the Finland-based Company has the financial strengths needed to let the former grow without worrying too much about the profitability in the short term.

Deal Structure

As the transaction is not a big-scale one, its structure is quite simple. Therefore, it will be settled in cash and it gives the Withings the value of €170m. The deal is expected to close in the early third quarter of 2016, subject to customary closing conditions and regulatory approval. As a result of the deal structure, Nokia will see a new Digital Health business unit headed by Withings’ CEO, Cedric Hutchings.

Given that Withings does not disclose its financial statements, it is hard to see whether this deal is fairly priced and how much of the price is attributed to synergies. Nevertheless, it is useful to know that the valuation of the wearable tech companies is in decline and that the Withings’ rival -Fitbid is currently trading at 60% below its post IPO peak.

Deal rationale

Nokia’s shift to Internet of Things clearly exhibits the fact that it is now headed towards the future of the digital technology market, since the sales of its smartphones have plummeted in the last years. In fact, Nokia was once the world’s biggest phone maker, but had to withdraw from this business in 2014 given the duopoly established by Apple Inc. and Samsung Electronics Co. As a consequence, Nokia’s well-known slogan “Connecting People” has not lived up to its hype. However, with this acquisition the Company looks to relive its mission. Withings’ position as one of the first movers in the fast-growing Internet of Things healthcare devices industry may prove a significant opportunity for the Finnish Company, which already has done internal research on a device with wrist sensors. Thus, Nokia expects the acquisition to improve its capacity to compete as Withings’ expertise would bring it to the industry’s technological frontier.“With this acquisition, Nokia is strengthening its position in the Internet of Things in a way that leverages the power of our trusted brand, fits with our company purpose of expanding the human possibilities of the connected world, and puts us at the heart of a very large addressable market where we can make a meaningful difference in peoples’ lives” said Rajeev Suri, president & CEO of Nokia.

At the same time, the transaction is also a smart move for another part of Nokia’s remaining business: its patents. Through this deal, in fact, Nokia which has one of the largest patent portfolios in the technology field, expects Withings to ensure the expansion of the latter and thus generate considerable yearly revenues through its innovations.

On the other hand, Withings has found a big backer in an era where tech investors have become warier of low-margin wearable devices. Cedric Hutchings, co-founder and CEO of the startup, explains that he had been looking since early 2015 for new investors to get the financial means to expand his company. “Since we started Withings, our passion has been in empowering people to track their lifestyle and improve their health and wellbeing,” said Cédric Hutchings, CEO of Withings. “We’re excited to join Nokia to help bring our vision of connected health to more people around the world.”

Finally, it’s also worth noting the peculiar synergies that the transaction would entail for Nokia’s existing high speed connectivity business unit. Indeed, marketing and selling these highly connected devices would entail a virtuous effect for Nokia, since it would pocket money from device sales while also increasing demand for connectivity that it provides through its networking gear. This because internet-based devices would benefit from 5G connections that offer better performances compared to the existing 3G and 4G ones. The consequence is that future sales of the Internet of Things devices (enhanced by the new financial and operating platforms brought by the new ownership), will inevitably drive telecom networks to install the 5G technologies that Nokia has been heavily working on lately.

Conclusion

The times when Nokia was the world’s biggest mobile phone maker have vanished, but this move shows a positive attitude and the ability of the company to quickly adapt itself to the current and future market needs. Moreover, this move could open a new successful chapter for the Finnish Company in the growing industries of digital heath and Internet of Things.

Financial Advisors

Neither Nokia nor Withings disclosed the financial institutions that advised them on this deal.

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