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Case: Nokias Growing Cash Mountain | Protagonist: Jorma Ollila, Chairman & CEO,

Nokia Corp
The case deals with the cash management, dividend payout & decision making at Nokia. In
November 2002, Nokia had assets of 8 billion and was generating 1 billion in cash per
quarter. Their long-term debt was around 450 million and 2.6 billion as account payable.
Ollila had to make a decision on whether the company should maintain its current cash level,
stock buyback or pay-out more dividend. The company didnt have any immediate
acquisition, and it was threatened by credit rating agencies like S&P and Moody of
downgrading if it goes for stock buyback option. Nokias cash position was extremely strong,
by having 9.4 billion in cash. It had spent, on an average, between 30 and 40 percent of its
annual after-tax earnings on dividend payout.

Overview of the Mobile & Network Industry:

The entire mobile and wireless telecommunication industry were in a time of flux. The sector
had not experienced growth in both infrastructure and handset segment after 2000. It was
estimated that overall mobile market would be stagnant, with the total number of the mobile
subscriber to reach 1 billion in 2002. Open Mobile Alliance was formed in November 2001,
which was an attempt to define open standards for the mobile industry in order to increase
consistency across platforms, operators and geographic locations. The industry was in the
midst of moving from 2G to 3G. The mobile infrastructure was estimated to decline by 20
percent for 2002; economic slowdown was the reason responsible.
The challenge for network industry was to integrate internet capabilities with imaging and
provide a smoothly functioning network service.
Nokias Position:
Founded in 1865 as a paper manufacturer, which later turned into a diversified conglomerate
manufacturing a broad range of products from telephone cables to rubber boots. In the 1990s,
the company switched to telecommunications as its core business and divested activities
outside its core area. The company had two primary business mobile phones and networks in
late 2002, where mobile phones accounted for 78% of revenue and network responsible for 21
%. The company also operated in ventures, which was focussed on developing new ideas and
providing the capital for new businesses to become sustainable enterprises. The company was
a leader in GSM protocol.

Financial Position:
The company had estimated 9.4 billion in cash, which was an increase of 52% of the previous
years cash balance. The reason mainly responsible for this increase was companys decline
in investment activities, fewer long-term loans extended to customers, reduction in capital
expenditure and a less aggressive acquisition plan. With a vast stock of cash piling up, the
management had to decide whether to provide the shareholders with a special dividend or to
buy back the 5% shares. The problem with buying back was that there was the possibility that
credit rating agencies could lower the rating of Nokia, Moodys had already downgraded the
Ericssons rating to junk status.
The company was listed in Helsinki(Finish) and New York stock exchanges. Prices of
Nokias stocks had fallen considerably, because of economic slowdown and stock split,
which happened four times after 1995 in both exchanges.
Our Findings and Position:
The company should maintain its cash balance as the year 2002 was the duration of recession
across the globe, especially in the developed countries. And, if the enterprise decides to pay
out the dividend or buybacks 5% of the equity from the market, it will not have an adequate
cash balance. And if in need of cash for any project or expansion or in the case of any
emerging disruptive technology on which they want to invest in, they have to resort to
external financing. The external funding in a situation where rating agencies had already
downgraded your company would be difficult and the external financing during the period of
recession will be extensively expensive or simply unavailable for technology companies as
the risk involved in new projects is too high.
With huge cash balances, the company can also finance the Nokia network customers or
network service providers with sufficient financial capabilities to repay the loan. In the time
of uncertainty and risk, and the credit rating agencies being overly conservative, there were
high chances that the agencies would have downgraded the rating for Nokia if they bought
back the shares or given a special dividend thinking that Nokia doesnt have any plans for
acquisitions or use in new projects. This, in turn, would have resulted in decreasing the stock
prices and shareholders value. With stiff competition in the Asian market, the company can
rather invest in R&D and marketing so as to maintain its stronghold in the industry and not
give any special dividend or buyback. As stated by some of the industry observers, the
company can use the cash pile for cracking the CDMA protocol market. Unlike Nokia,
all other competitors had negative operating income but still had cash pile greater than
Nokia, so there seems no reason for Nokia of using its cash for paying out a dividend or
buying back (Exhibit 3). The company should also focus on the acquisition of group
companies as there has been a drastic decline from 400 million euros in 2000 to 131 in 2001
(Exhibit 4b).
The company had always made a decent investment in R&D, with this excess cash
either they can go for WCDMA expansion and do research on integrating imaging &
internet facilities in CDMA, where they were lagging, or the company should go for
acquisition believing that the year 2002 was an economic slowdown for the entire
telecom sector.