Finnish tech giant Nokia’s (NYSE:NOK) shares are off about 47% as we near the year’s midway point. And, as one would imagine, buyout rumors are starting to swirl.
After all, with the stock selling at a price-to-sales ratio of only 0.19, a deal could come pretty cheap. Still, investors hoping to get in on an M&A bounce should exercise a little caution.
Since the launch of Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android operating system, Nokia has come under brutal pressure. Simply put, the company has failed to innovate.
When Nokia’s new CEO, Stephen Elop, came on board last year, he was honest about the situation. He wrote a famous memo about a “burning oil platform” and that the company would need to undergo a radical transition.
That burning platform is practically ash at this point. While Nokia’s strategic partnership with Microsoft (NASDAQ:MSFT) has provided much-needed cash, it has not resulted in products that consumers and businesses want. Windows might be a good system for desktops and laptops, but it has proven to be ill-suited for smartphones. Because of this, the platform has not engendered a strong developer community — a scary fact, considering Microsoft already has a massive developer ecosystem with its other software offerings.
So where does Nokia go from here?
Right now, Elop is taking the slash-and-burn approach typical of struggling companies, announcing the layoffs of about 10,000 employees this week.
Not surprising. Tech turnarounds usually fail. And as for those that succeed, like Apple? Well, you need a product genius like Steve Jobs behind the wheel.
So if a turnaround’s not in the cards, does that make Nokia a buyout candidate? Definitely. The company has more than 10,000 patents, which could be worth more than $7.5 billion, according to MKM Partners. It also has a net-cash position of $5.9 billion, which compares to a market cap of $9.2 billion.
But investors should be wary of basing a stock decision solely on the possibility of a buyout. After all, Nokia should have enough resources to stay independent for a couple years, and Elop still might have faith in the company’s product strategy. Plus, Microsoft probably will provide more cash to keep the company stable.
Investors should instead look to Nokia’s underlying fundamentals. The main issue is: Can the company build a ecosystem? Perhaps, but doing so would take several years. The same was true for Apple and Google — and they had the advantage of entering a new market, not battling a fiercely competitive and mature one.
Nokia hasn’t shown anything resembling a winning hand. So, sure, the stock looks cheap — but it could stay that way for quite some time, bleeding deal-minded investors dry.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.