In the top job since April 2014, Nokia (NYSE:NOK) CEO Rajeev Suri announced March 2 that he will step down at the end of August, staying on as a consultant until the end of the year. NOK stock gained slightly on the news, but it’s since lost 12% of its value due to the coronavirus outbreak.
Suri is to be replaced by Pekka Lundmark, the current CEO of Fortum (OTCMKTS:FOJCY), a Finnish clean energy company. Suri’s done his best to right the Nokia ship. Now it’s up to Lundmark to deliver on the company’s plans for 5G.
Is this nothing more than a senior executive choosing to move on to life’s next challenge or the sign of a bigger problem? Let’s consider both sides of this issue.
25 Years Is a Long Time at Any Company
If this were the 1970s and the Indian-born executive stepped down from his job after 25 years of service, I could see shareholders being concerned. However, it’s rare nowadays for people to stay at companies for multiple decades as Suri has.
According to the State of Oregon Employment Department, those aged 55 to 64 had a median tenure of slightly more than 10 years in 2018. The median age for those over 65 was also somewhat more than 10 years. Suri is 52 years old. The median tenure for those 45 to 54 is approximately 7.7 years, 2.3 years less than the 55 to 64-year-old category.
Millennials, thought of as the least loyal of the age demographics, had a median tenure of 3.0 years (25 to 34), 1.5 years (20-24), and 0.8 (18 to 19). However, the government agency’s data shows that Boomers (54 to 72 years of age in 2018) had similar tenures when they were between the ages of 18 and 34.
Nokia’s current CEO has stayed about three times the norm for someone of Suri’s age.
Further, the optimal tenure of a CEO, according to a 2012 Temple University study, is less than five years. One of the authors of the study is Fox School of Business Professor Xueming Luo, who said that “the search for external knowledge tends to end.” Furthermore, CEOs tend to surround themselves with loyalists (much like President Trump), resulting in diminishing returns.
So, both in terms of overall service and time spent in the top role at Nokia, Suri is more than overdue for a change. That’s especially true given he’s only 52 years of age. His experience of operating a global business would be welcomed by any large company searching for a new leader.
As Suri said, “After 25 years at Nokia, I have wanted to do something different.”
While he might be leaving before the expected 5G impact, the fact that he was able to deliver an operating profit of two billion euros in 2019 despite it being a challenging year for the Finnish company is plenty to be proud of. It’s time to move on.
It Could Be a Sign of a Crack in Nokia’s Resolve
As we moved through 2019, Nokia outwardly seemed confident about its ability to capture a big chunk of 5G business around the world. In early February, I discussed how the company’s 5G win in France could be the news that solidifies Nokia’s stock price.
“To move Nokia past $5 toward $10, it has to get other telcos in Europe and elsewhere to announce similar agreements. In the months ahead, Nokia speculators better hope more of these agreements are forthcoming,” I wrote on February 6.
Through the end of February, competitor Huawei had 91 commercial 5G contracts, 10 more than Ericsson (NASDAQ:ERIC), and 23 more than Nokia. Despite the headwinds Huawei faces as a Chinese company, the fact that it’s managed to secure the most 5G contracts suggests Nokia is losing the battle for 5G equipment contracts.
As a result, discussions between itself and other interested parties, including Ericsson, are said to be taking place with an outright sale or a partial divestiture of assets on the table. Having Suri out of the way during potential discussions would make it easier for interested parties to strike a deal.
One company that won’t be buying Nokia is Cisco (NASDAQ:CSCO). It feels the margins are too low to justify a multi-billion-dollar acquisition. U.S. Attorney General William Barr would like to see a U.S. tech company buy Nokia or Ericsson to secure America’s future 5G plans without Huawei in the mix.
I find it hard to believe that an American tech company would step up to the plate to buy Nokia. The new CEO’s hands are likely to be full once he takes over September 1. Analysts liked the change in CEO.
“We believe a change of management is positive for Nokia, which has been struggling with significant levels of senior management turnover amid weak profitability and losses of market share,” Liberum analysts wrote in a March 3 note to clients.
The Bottom Line on NOK Stock
As I said at the beginning of February, Nokia stock is only a buy for speculative investors. Everyone else has no business entertaining a trade.
As for Suri’s departure, it’s hard to know whether this was his idea or not. The company’s press release suggests Suri was involved in Lundmark’s hiring.
“Nokia’s Board of Directors has conducted a structured process for CEO succession and has been working closely with Suri to develop internal candidates and identify external candidates. That process culminated today, March 2, 2020, when Nokia’s Board of Directors decided to move forward with Lundmark’s appointment,” Nokia stated March 2.
I find it hard to believe that Suri would have walked away from continuing Nokia’s turnaround if he had the confidence of the board.
Does his departure hinder Nokia’s 5G progress? I think it does.
Even if the new CEO is brought up to speed on Nokia happenings over the next few months, it’s still going to take him a while to get comfortable in the job. Time Nokia can’t afford to waste.
I wasn’t a believer in Nokia in February. I’m definitely not today.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
