Adding up the valuation numbers for Nokia – but not adding up

Here is a great example of the pitfalls of valuation of intangibles — and of what the stock market says a company is worth. Let’s go through the numbers for Nokia according to a story in Sunday’s Washington Post – “How Nokia put itself at risk for a takeover bid”.
According to the Post story, as of last Thursday, Nokia’s market capitalization was $8.6 billion. It had a net cash position (cash on hand minus debt) of
$5.9 billion. It is sitting on a patent portfolio that some have estimated to be worth $7.5 billion. So all Nokia’s other tangibles and intangibles (tangibles — plant and equipment; intangibles — brand, manufacturing know-how, distribution channels, etc) are worth a negative $4.8 billion.
It seems that sometimes the parts are worth more than the sum of the whole.
The key point is that Nokia is grossly undervalued by the stock market — and is ripe for someone to buy. But there doesn’t seem to be anyone rushing out to buy. The problem is that no one necessarily knows how to make use of all those parts. And no one seems to want to buy the whole, either. As the Post story notes:

Michael Genovese, managing director at MKM Partners, said an acquirer is unlikely to step forward now while the company is still losing market share.
“I’ve been in the stores, and no one is buying Nokia’s Windows Phones,” Genovese said. “I don’t think anyone will be buying them any time soon. Microsoft may eventually end up buying Nokia, but that’s at least a year away.”
. . .
“Who would buy them at this point?” said Lars Soederfjell, a Stockholm-based analyst with Bank of Aaland. “You need to stabilize the business. There’s too much uncertainty. It’s more like buying a lottery ticket than anything else.”

At least with a lottery ticket you know the odds, the payoff and the date of the drawing. With Nokia everything seems to be still up in the air. We will have to keep an eye on the Nokia case to see if someone can engineer an intangible-based turn-around. If the business does not stabilize, we may be looking at a very different case study: how to liquidate an intangible-based company.

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