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Mergers & Acquisitions: the Case of Microsoft and Nokia Mergers & Acquisitions: The Case of Microsoft and Nokia Luís Franco Hilário Advisor: Peter Tsvetkov Dissertation submitted in partial fulfillment of requirements for the degrees of MSc in Business Administration, at the Universidade Católica Portuguesa SEPTEMBER 2011 1 Abstract Due to the financial downturn and the emergence of new devices in the global handset market has led companies to change their business strategies. Indeed, Mergers and Acquisition are considered one of the best strategies to increase shareholder value despite its hardship to be well-implemented. For this reason, a consolidation between Microsoft and Nokia may create new opportunities to challenge the market. Thereby, the focus of this dissertation will be the calculation of the additional value created by combining both firms bearing in mind the companies’ financial situations. All this considered, Nokia’s average share price during the last year is considered to have a 0.14% upside potential and synergies are estimated around 13% of Nokia’s average market capitalization. As a result, an offer at 19.4% premium over Nokia’s average market capitalization will be suggested with 100% in cash. 2 Acnowledgments The author would like to thank: Professor Peter Tsvetkov, the Dissertation Advisor, who has provided several thoughtful comments and an immeasurable help throughout the thesis. ; his friends, who provided assistance and feedback by detecting and reporting errors; finally to his family for their forbearance and support. 3 Table of Contents 1. INTRODUCTION ............................................................................................................. 7 2. LITERATURE REVIEW .................................................................................................. 8 2.1 Valuation Methodologies ................................................................................................................. 8 2.1.1. Cash-Flow Approaches ............................................................................................................ 10 2.1.1.1. The Cost of Capital ........................................................................................................... 11 2.1.1.1.1. Risk-Free Rate ( ) ................................................................................................... 13 2.1.1.1.2. Beta (β) .................................................................................................................... 13 2.1.1.1.3. Market Risk Premium ( ) ............................................................................. 15 2.1.1.2. Free Cash Flow to the Firm Model .................................................................................... 15 2.1.1.2.1. Terminal Value ......................................................................................................... 16 2.1.1.2.2. Expected Growth Rate .............................................................................................. 17 2.1.1.3. Adjusted Present Value (APV) .......................................................................................... 17 2.1.2. Relative Valuation ................................................................................................................... 20 2.2. M&A related issues ....................................................................................................................... 22 2.2.1. Main types of M&A ................................................................................................................. 22 2.2.2. Synergies - “The creation of value”.......................................................................................... 24 2.2.3. Cross-Border M&A and Emerging Markets .............................................................................. 25 2.2.4. Methods of Payment .............................................................................................................. 27 2.2.5. Post-acquisition Returns ......................................................................................................... 28 2.3. Conclusion..................................................................................................................................... 30 3. INDUSTRY AND COMPANY ANALYSIS .................................................................... 31 3.1. Overview of the Global Mobile Industry ....................................................................................... 31 3.1.1. Current Market Trend – “The emergence of the tablets” ......................................................... 37 3.1.2. Technology market growth opportunities in Asian economies ................................................. 38 3.2 Microsoft Corporation.................................................................................................................... 39 3.2.1. Windows and Windows Live Division ...................................................................................... 42 3.2.2. Server and Tools ..................................................................................................................... 43 3.2.3. Online Services Division .......................................................................................................... 45 3.2.4. Microsoft Business Division ..................................................................................................... 46 3.2.5. Entertainment and Devices Division ........................................................................................ 47 3.3. Nokia Corporation ......................................................................................................................... 49 3.3.1. Devices & Services .................................................................................................................. 52 3.3.2. NAVTEQ .................................................................................................................................. 53 3.3.3. Nokia Siemens Networks ........................................................................................................ 54 4. PERFORMANCE OF BOTH COMPANIES IN THE STOCK MARKET .................... 56 5. HISTORICAL OF M&A – “A ROUTE FOR PORTFOLIO DIVERSIFICATION” ..... 57 4 6. PERFORMANCE FORECAST ....................................................................................... 60 6.1. Microsoft’s Standalone Valuation – Base case scenario ................................................................ 60 6.1.1. Revenues ................................................................................................................................ 61 6.1.1.1. Windows & Windows Live Division ................................................................................... 61 6.1.1.2. Microsoft Business Division .............................................................................................. 62 6.1.1.3. Server and Tools .............................................................................................................. 62 6.1.1.4. Online Services Division ................................................................................................... 62 6.1.1.5. Entertainment and Devices Division ................................................................................. 63 6.1.2. Operating Expenses ................................................................................................................ 63 6.1.3. Assets, Liabilities and Equity.................................................................................................... 65 6.1.4. Net Working Capital ................................................................................................................ 65 6.1.5. Capital Expenditures ............................................................................................................... 65 6.1.6. Financial Leverage and Cost of Capital ..................................................................................... 66 6.1.7. Sensitivity Analysis .................................................................................................................. 68 6.1.8. Multiples Valuation ................................................................................................................. 68 6.2. Nokia’s Standalone Valuation – Base Case Scenario ...................................................................... 69 6.2.1. Revenues ................................................................................................................................ 70 6.2.1.1. Devices and Services ........................................................................................................ 70 6.2.1.2. NAVTEQ ........................................................................................................................... 71 6.2.1.3. Nokia Siemens Networks ................................................................................................. 71 6.2.2. Operating Expenses ................................................................................................................ 71 6.2.3. Assets, Liabilities and Equity.................................................................................................... 72 6.2.4. Net Working Capital ................................................................................................................ 73 6.2.5. Capital Expenditures ..............................................................................................................
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