Nokia's Growing Cash Mountain

[pic 3]

CASE ANALYSIS

NOKIA’s GROWING CASH MOUNTAIN

Group 3F |Financial management II | 13/03/2017

Introduction

In 1865, Nokia started as a paper manufacturer, and by 1967 it became a diversified conglomerate. After a series of innovations, it slowly entered telecommunications as its core business in 1992. As of 2002, Nokia was the global leader for mobile phones. It primarily had two main businesses – (1) Nokia Mobile phones- which contributed 78% of revenues and 107% of operating profits and (2) Nokia Networks - which accounted for 21% of the revenues and only 1% of the operating profit. In 2002, the market was relatively stagnant for the mobile phone industry, even then Nokia posted a 9% increase in revenue over 2001. Nokia’s holding pattern comprised institutional investors, employees, private investors and investment funds but no one held more than 5% of Nokia’s share.

Financial Status

Network division of Nokia was predicted to cause a 4% decline in net deals in 2002. The sluggishness in the economy had prompted a fall in the share prices from $37.56 in November 2000 to $16.70 in November 2002. In 2001, its cash reserve had risen by 46% to €6.1 billion. There was further anticipation that it would ascend by 52.7% in 2002 to €9.4 billion because of a decrease in investment activities like:

• Slowing down its acquisition activities
• Reduction in long-term loan offering to customers
• Reduction in capital expenditure

Dividend Policy

Nokia utilized 30-40% of its yearly after-tax profits for the dividend pay-out. The organization regularly paid dividends still there were large-scale variations based on the economic downturns and growth endured by it. The 1994 dividend recorded a 260% increase over the previous year while in 1995, the dividend was slashed by 70%. But in both the year dividend factored about 20-23% of the EPS.

Problems faced by the management given growing cash balances

The CEO of Nokia Corporation faced challenges in evaluating the following alternatives

• Increasing the rate of dividend
• Buyback 5% of the total shares at €3.5 billion instead of a special dividend
• Cash balances to be maintained at current level

Increasing the dividend rate did not make much sense as the company was paying 30-40% of its earning as a dividend which was unlike most technology companies.

Nokia was concerned that the buyback would elicit a negative reaction from the credit rating agencies which could lead to a possible downgrade.

Recommendation:

Nokia should not maintain the current level of cash because: