Nokia Keeps Burning — But How Long Can It Hold Out?

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We noted yesterday that Nokia was lowering its financial outlook for 2011, suggesting that lower sales and decreasing margins were having a significant effect on the company’s bottom line. Talking about the announcement, CEO Stephen Elop said that “going through this transition, it’s hard”.

He didn’t know how right he was — since then, the market has taken the news very badly. Immediately after the announcement, shares tanked by some 15-20 percent, and today they’ve continued to struggle. Reuters reports  that with a share price now around €4.64 ($6.69 USD), “The stock is at its lowest level in more than 13 years.” Elop can probably feel every single pound of pressure from Nokia’s shareholders coming to bear on him right now.

But even though he’s going to face some serious questions, Elop’s mantra remains the same: Stick with me, we’ll get there in the end. After all, radically transforming any company takes time. As Elop pointed out in the famous “burning platform” memo, fixing Nokia’s problems requires bold action. Getting the mobile giant to shed its burdens — an inability to ship products, a reliance on unresponsive in-house smartphone software — is tough, and it doesn’t happen overnight.

Lots of people invested in Nokia are clearly questioning whether this transformation was the right thing to do, realizing the short-term financial outlook is pretty bad and cutting their ties. I don’t think that’s the way to look at the situation, however. The question isn’t whether Elop was right to follow this path. You may not agree with his decision to sign up with Microsoft  and use the Windows Phone platform, or to cut back on employees, but it’s clear that something had to be done.

The question is whether, in trying to fix what is broken, he’s going to leave Nokia in an even more perilous position. Not only do shareholders have to keep their faith in the idea that things can be turned around, but they have to remain untempted by the interest of rivals who might see an opportunity to swoop in.

After all, a substantial share price drop makes Nokia significantly cheaper: with a market cap that now stands at around $26 billion, it’s more affordable than ever. A company like Apple, which has built up a cash pile of almost $30 billion (in cash and short-term securities) as of the end of its most recent quarter, could purchase Nokia outright.

Obviously there’s not a great deal of incentive for Apple to do so, but that doesn’t mean there aren’t others who might be interested. The rumors are already swirling that Microsoft — which has already already bought Skype for $8 billion — is considering an acquisition of its newly-minted partner. The idea of somebody else jumping in to gain access to the Finnish company’s considerable assets is not inconceivable.

Faith, however much you have, can only last so long… and until Elop can bring some good news, Nokia’s going to look more and more like a target each day.

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