Here's why Huawei might be serious about acquiring Nokia

It's like at least one company being acquired by Chinese behemoths every day in Europe. Is Nokia, once's Europe's most profitable tech company, the next to be acquired by a Chinese OEM?

The hint on interest to acquiring Nokia comes from Huawei's device chairman, Richard Yu, who told an FT interview on Tuesday, "We are considering these sorts of acquisitions; maybe the combination has some synergies, but depends on the willingness of Nokia. We are open-minded".

In June, three prestigious European companies - Bordeaux wine châteaus, Bon Pasteur, Rolland-Mallet and Bertineau St.-Vincent - have been acquired by the Hong Kong-based Goldin Group for undisclosed amounts.

The last major tech company acquisition by a Chinese company was in 2005, when Lenovo acquired IBM's PC business. Ever since, Lenovo has spent heavily over the the past few years to strengthen its PC business and today, stands as the No. 2 personal computer vendor by unit sales.

Lenovo's slew of acquisitions has also sparked market talk that it might be interested in IBM Corp's server business, as well as handset makers Research In Motion and Nokia Oyj.

The Chinese PC maker posted net profit of $126.9 million in the quarter ended March, up from $66.8 million a year earlier, based on Reuters calculations using full-year and nine-month financial data. Lenovo has cash totaling $4.5 billion, vastly outweighing a debt of $423 million, and giving it the muscle for more buyouts.

Why Huawei wants to acquire Nokia

Nokia's current market value is estimated at $14 billion with cash reserves of $13 billion. According to some calculations, Nokia's patent portfolio alone might be worth nearly $10 billion.

The Chinese telecom giant, Huawei, sits on a huge cash pile. It's overall net profit is reported at CNY 15.4 billion, which is a 33 per cent increase from the previous year. Furthermore, the manufacturer expects its global sales revenue to reach CNY 220.2 billion, an 8 per cent year-on-year increase.

Huawei's mobile product portfolio, however, has been described as 'solid', but not 'groundbreaking'.

Despite attempts to expand its smartphone operations outside of China and Asia, Huawei's efforts haven't proven fruitful. Huawei is definitely a force to be reckoned with in China, but elsewhere around the world, it's yet to prove that it understands Western consumers. Huawei hasn't demonstrated that it can appeal to consumers in both markets, even if it were given the chance to compete in the U.S..

The first is that smartphones only make up half the mobile phones sold in the world today - 49.3 per cent of the 426 million sold in the first quarter, to be precise. That percentage is steadily increasing, but it will probably take years, even decades, for all smartphones to completely take over.

 

The reason is simple: Even as the price of smartphones continues to fall, feature phones are getting cheaper as well, and will get to nearly zero a lot faster. Already, feature phones are selling for as little as $10, and in places like India, mobile data plans are as low as $2 a month.

The second thing that makes Nokia an attractive acquisition target is its hard-won ability to localize its phones for various markets. Nokia remains popular in India, for example, because of the library of India-only content and apps the company has fostered on its Asha smartphones, which are really more like feature phones tricked out to operate like smartphones.

"I don' t think there is any serious move on part of Huawei to acquire Nokia," says telecom analyst Tarun Pathak of Cyber Media Research (CMR), pointing out that both companies have so far not made any comments on the acquisition.

Nokia's numbers may be down, but its shipments are increasing, though not on par with Android or Apple phones. It looks like Nokia's Windows strategy is slowly paying off and it can be in a better position after new launches in Q2 and release of Nokia tablet in the coming months, Pathak adds.