It’s not news anymore, but Microsoft is acquiring Nokia for a pocket change of US$ 7.2 billion.
This is for a company that, just six years back had a market capitalization of US$ 145 billion, and US$ 20 billion a year ago.
“It’s a bold step in the future,” says the Microsoft chief Steve Ballmer. Time would tell that…and time, as Mr. Ballmer must know is very important when decisions are irreversible.
By the way, Microsoft lost US$ 15 billion from its market cap after announcing this US$ 7.2 billion acquisition! 😮
What is more, Nokia has seen its smartphone market share decline from 25% in 2010 – when it first partnered Microsoft – to 5% now. So why is this “strategic partnership” a bold step is known only to Mr. Ballmer.
Anyways, here are 10 quick lessons you, as an investor, can take from Nokia’s fall and apply them to your own analysis of Indian companies. There may be many more lessons, but here are my top ten picks…
10 Lessons from Nokia’s Fall
- Don’t take Peter Lynch’s idea of “buy a company whose products you love” on face value. Even Lynch did not mean it that way. Nokia 3315 was the first thing I had purchased using 33% of my first-ever salary in 2003, and I am yet to find a better mobile handset. But then…
- Businesses change in the future, more than they have changed in the past. So don’t rely 100% on a company’s brilliant past. And please don’t rely at all on that excel model that helps you easily create a bright future.
- You will hear a lot of bulls**t from companies that are going down the hill – things like “going through a transition”, “new strategy”, “synergies”, “leveraging new opportunities”, “moving to a brighter future” etc. Don’t trouble your brain trying to guess what these mean. Simply avoid such companies.
- Superior technology is not a moat. It never was. The benefits rarely fall to the bottomline, and are mostly passed on to the customers. See how better technology has gotten cheaper over the years. So, good for you but not for tech companies.
- Beware of companies full of corporate arrogance, complacency, denial and hubris. Such companies often fall, and big time!
- Be watchful of companies that ignore competition. For such companies, there are several “Oh s**t!” moments waiting to happen.
- Remember the “frog in boiling water” effect. Nokia has been in boiling water for long without accepting that that water was killing it.
- A person who neglects family for years will have a tough time winning back trust. Nokia did that for long with its family – its diehard customers. Most service-oriented companies in India are doing that already. They lure new customers, and mistreat the existing ones.
- When companies grow very big and successful, they often get bureaucratic. And that’s one big cause of their downfall. So if someone tells you that large businesses/stocks are safe businesses/stocks, you know the stupidity of the argument.
- Remember what a wise man once said – over the long-run you will probably do better building a portfolio of companies that make you uncomfortable than building one of companies that make you comfortable (and Nokia made a lot of its investors comfortable till a few years back).
Microfost, yeh tune kya kia! Iski sazaa milegi…barabar milegi! 😉
Ha ha he he …. for the finishing line … sazaa milegi barabar milegi. Awesome, part to mil gayi with fall in mkt cap. Hopefully they know better !!
All points capture very relevant points.
Points 3 and 9 are pithy. Strategy, synergy and a lot of jargon like this is deployed time and again. If you indeed ask what they mean and get long winding not easy to comprehend answers beware. Those I would agree with Vishal are the first signs that will sing a horrible tune later.
Dear Vishal
Good morning to you
In the fourteen years of Mobile Telephony usage,I have had just two mobiles…The first one was the iconic 3310 that i used for 8 years and the second one is also one of the trend setters the N70 which after six years of dedicated service is still servicing me…..so it could be told that I am a nokian.
Nokia had good durable products….but as warren buffet said ,”I am wary of the company which is at the mercy of technological changes”.Nokia was also guilty of the same,it could not adapt to the ever and fast changing world of mobile telephony…it was always in the self denial mode…the same thing happened to BLACKBERRY,though things were changing fast near and around them,they were finding comfort in their cocoon and by closing their eyes they were telling themselves that everything is black and still.
Really the condition of Nokia and Blackberry could throw much insight into the way we invest and how we also sometimes to comfort ourselves go into the self denial mode,instead of our accepting mistake that we made a investment blunder,we try to prove it right by giving much more confirmation points.There is nothing more dangerous in the Investment field by getting into self denial mode,it stops the brain from processing the basic information that is in front of us decipher.
I have also seen people buying into a stock listening to some corporate actions,they do not wait to carry a postmortem of the corporate action.One of the prime example was Clariant chemicals on which i had written a post.
so just subscribing to the long term story does not help,we also need to understand the environment in which a company does business.
Good Post….A simple and understanding one
Thanks and Regards
Safe and Happy Investing
Reni George
Reni some points to ponder,
To assume Nokia did not know it was going to get hammered would be very surprising. While a large corporate has bureaucracy the fact is it is needed to keep it going. I guess it would have just not been able to do enough or found itself struck by change which could not be addressed by it. Did it not spot the flip phone, touch screen etc I would be skeptical, they must have spotted and probably ruled it out as a major threat (which is fine, decisions seem a stroke of genius or stupid in hindsight only).
My sense is such stuff (change which overwhelms) will keep happening to a host of industries (especially technology related) and therefore from an investing point of view I am unable to create a model except that “invest only in what you understand”. Problem with this also is there are so many unknowns.
For example a cell phone is now a mini laptop (or may be more) and has more or less substituted (i) camera (ii) camcorder (iii) watch/ clock (iv) radio (v) music player (vi) possibly a desktop or laptop (vii) scanner (viii) torch etc. I also read somewhere some cell phone models can emit frequencies which keep insects away and that it is a decent substitute for mosquito repellents ! This was the first time I heard a cell phone hitting out at FMCG !!
The paradox is that such industries are the ones which will witness fast growth and therefore entice you to invest.
May be in most cases it should be that make profits and exit.
Good perspective, especially the finishing.
Lovely Post Vishal! Seriously been getting better understanding ever since I stumbled upon your blog.
Regards,
Ajay
I read SafalNiveshal regularly and it is annoying how it is slowly moving to the easy role of post mortems. Post mortem is easy. It would have been wonderful if this analysis had come a year or two earlier.
I break each point made above:
1. On an average the companies whose products we love do great. Errors will be there with any strategy
2. Nokia has changed more than any other company in the world
3. Bata has done this twice (read in the earlier SafalNiveshak post), Dabur did it with help from McKinsey, American Express did it (Warren Buffett’s famous rational for buying it) and SKS MFI is doing right now. On an average we can avoid companies with future looking statements, but buying turnaround stories is a strategy too
4. Nokia never was about superior technology. It was about durability and distribution.
5. We would prefer if you can give articles, references where you can substantiate this claim about Nokia
6. We would prefer if you can give articles, references where you can substantiate this claim about Nokia.
7. And what exactly should have Nokia done? Please give at least one alternative
8. Nokia made products which required no servicing; I am sure 3315 never needed customer/product service. Nokia’s moat was distribution, price and robust product, and not customer care.
9. Nokia was always big, even before it made mobiles and will remain big after this sale, I will tell you how in a moment
10. I am open to this notion, but it somewhat seems to me to fly in the face of Warren’s theory about circle of competence
Nokia’s background – Nokia is more than 100 years old company and stands for communication. 100 years ago, we communicated using paper, Nokia was into it. We moved on to communication over the radio and Nokia was into it. And when the communication moved to mobile phones, Nokia was there too. Look out for the next thing from what remains of Nokia’s stable. It could be the next big thing.
Dear Saket,
Thanks for reading Safal Niveshak despite the annoyment 🙂
I would have never written on Nokia but for the lessons it serves to investors while analyzing similar situation in the “future”. So, it’s not really a post-mortem but a pre-mortem case study for Indian companies that are like Nokia.
1. On an average the companies whose products we love do great. Errors will be there with any strategy
Agree. But the probability of making an error increases with an industry’s complexity and levels of change. It’s a game of probabilities.
2. Nokia has changed more than any other company in the world
So what? Most tech-related companies do.
3. Bata has done this twice, Dabur did it with help from McKinsey, American Express did it (Warren Buffett’s famous rational for buying it) and SKS MFI is doing right now. On an average we can avoid companies with future looking statements, but buying turnaround stories is a strategy too
“Turnarounds” may be be a strategy and it may work well for a few, but it’s a strategy where “return per unit of stress” is high. And by the way, as Peter Lynch said, “Turnarounds rarely turn around.” History is proof of that.
4. Nokia never was about superior technology. It was about durability and distribution.
Yes, but it lost of its core purpose of existence – customer delight. Distribution and durability fails if the customer is not happy, or is happy somewhere else (Samsung, Apple)
5. We would prefer if you can give articles, references where you can substantiate this claim about Nokia
I have made no claims about Nokia. I just wrote about things that are obvious.
6. And what exactly should have Nokia done? Please give at least one alternative
It’s like asking – “What exactly should a KFA or any airline company should have done?” The industry is like that, and who knows tomorrow, even Apple or Samsung may bite the dust.
7. Nokia made products which required no servicing; I am sure 3315 never needed customer/product service. Nokia’s moat was distribution, price and robust product, and not customer care.
If “customer care” is not your moat, you are doomed!
8. Nokia was always big, even before it made mobiles and will remain big after this sale, I will tell you how in a moment
I don’t need proof of that. I know how it big was. But so was Goliath.
9. I am open to this notion, but it somewhat seems to me to fly in the face of Warren’s theory about circle of competence
Sorry but I did not understand this point!
Please understand that the “next big thing” is already here. It’s “customer delight”.
Nokia grew up in the industrial age, and things that worked than don’t work now. I know only this much. Thanks!
Good Analysis Vishal. Although there are several possibilities why Microsoft may have acquired Nokia – Maybe they wanted to expand their IP in smartphone business & felt that they could do a better job than Nokia. Maybe they wanted a good distribution network. Maybe they struck a bargain deal. There are lots of maybes.
However I agree with you. Synergy through acquisitions is very tough to map. Corporates always talk of synergies. However nobody talks of dis-synergies. E.g. while IP maybe acquired and monetized in the form of bundled services to existing customers. However it is equally true that if there are unplanned litigations over that IP, existing customers will severe relationship as it is tough to unbundle these services. All the more tough when there are host other competing products in technology space. One can mitigate many risks – but not all. Unknown variables are too much. Sometimes the cost of risk mitigation and management outruns the benefits of so called synergies. Most of the corporations don’t factor these costs.
I am not in a position to decide the impact on MS. I don’t know. However I feel that the healthy skepticism serves investors well rather than reckless adventurism.
I am not that conversant and knowledgeble with the systems, but the only thing I feel is that there was resistence from Nokia to embrace touch screen ( same as Blackberry) and then not using Android which even me, a hardcore Nokia fan knew was the future.
Excellent sum up of weak points…. The big are not so big, the small are not so small… Nokia was extremely arrogant of it’s leadership status, and their view was “We tell the market where to go, not the market us”… Just to create a differential, they did not join the Android market, and 5 years later, BOOM… Their pathetic answer till recently was Symbian, or at most Windows CE or something along those lines…
Only the paranoid survive! 🙂
Indeed Bharat. 🙂 Thanks for your comment!
Hi Vishal,
Interesting article on the latest news. I’m amazed to see an article related to today’s headline on Safal Niveshak in such a short time – good work!.
I’ll not go in to the details of the 10 points, but I do agree that one needs to do their homework before investing in tech companies – be it IT, mobiles, etc. If we look at developed markets such as the US where Apple touched a high of $700 and now its close to $500, it clearly shows the irrationality in the way stocks are priced.
Microsoft was once a top favorite, but today it may not be so, and Apple might face a similar fate, and who knows Google could also disappoint. Ultimately these companies have to deliver good returns to justify their prices. Sooner or later investors will look at financial performance and see what returns (earnings and dividends) are generated, and not about whether the latest App is hot or if a phone’s new model is a hit. Technology can make these obsolete in no time. Once a new version or model comes up the existing products and inventory become obsolete. And the same holds true when a competitor launches a new product or model.
I fully agree with you that a nice product doesn’t mean you can pick the company’s stock…..thats a good lesson.
I might be tempted to invest in Bata because I might have liked or used their products, but that doesn’t mean it qualifies as a good investment………this was just an example – this can apply to any company. One has to be more careful when investing in companies in the electronics space (even the likes of Apple would come in to this though they are classified as unique or premium products). Take companies making television, ACs, refrigerators, etc. These white goods companies always succumb to pressure and the business is subject to seasons and margins are always under pressure.
People are becoming smarter and choosing brands or products that have valuable features at a reasonable price, so the Moat may not sustain or remain durable for long.
Ok…Vishal….if Micromax comes out with an IPO, would you buy into it ?
Raghav, I won’t comment on a hypothetical scenario. But if you still want an answer – I avoid IPOs, for the pricing is never in my favour. Regards.
Not only Nokia, this is the fate of many big and small companies when you see the long history. In the short term (5-10 years) you can identify many great companies,in the long term(>25-30 years) very few of these survive and prosper.
Many people should have made great money spotting the rise and fall of Nokia.But people who tried to spot a turnaround may have failed badly.
Hi Vishal,
The Nokia story is a lesson and a good example for any individual or business.
If one individual or company wants to maintain their success or market share they need to adapt themselves to the latest technology, respond to customer needs, maintain financial discipline, etc.
The key lesson is to be willing to learn and improve all the time. In an economy where things are in a flux one has to be prepared to learn, relearn and improve oneself. Whether you want the best job, a big customer order, win a competition, etc the ability to reinvent yourself is inevitable.