Friday, February 07, 2020

Barr's right, the U.S. should buy 51% of Nokia and Ericsson

The U.S. Attorney General William Barr gets it and has finally articulated the same proposal that I have been promoting for several months (e.g. in this tweet one month ago):

The U.S. government, with or without a help of the U.S. private companies, should acquire a majority stake in Nokia, Ericsson, or both, and become a major player (and, in a few years perhaps, the #1 player) in the 5G mobile data industry because it will be a vitally important part of the economy that also gives the providers quite some influence and China – with its otherwise dominating Huawei provider of the 5G hardware – poses certain risks for the U.S. and its allies.

Mike Pence and the chairman of the FCC Ajit Pai have already declined to support the proposal, offering a non-solution instead, but that refusal may be just a maneuver to cover imminent plans to buy the stocks.

On the other hand, Ericsson works within Sweden and Nokia works within Finland, two Nordic countries that – with all my respect to those wonderful lands that are comparable to my homeland in importance – cannot be considered genuine geopolitical players. In fact, even the whole European Union could be claimed "not to be a major geopolitical player" right now. This fact has implications and causes a somewhat provincial market thinking of both companies that is disproportionate to the power that it hiding in 5G – and the potential that this power will be abused.

For somewhat random reasons, the U.S. companies have almost completely missed the 5G train although some important insights were made e.g. in the Bell Labs, historically an AT&T asset that is now owned by Nokia.

I think that the U.S. government shouldn't try to control such companies directly because it would be socialism. Governments may protect some interests and they may know what those are – but these interests don't determine the right decisions in hundreds of situations that decide whether it's a good business. So I think that it would be healthier if the controlling stakes in Nokia and Ericsson were bought by large enough U.S. technological companies.

The names may be changed – according to the results of a reverse auction of some type – but I will call these hypothetical future parents Apple and Cisco. Apple may easily buy Nokia, of course. Apple – whose own capitalization is $1.4 trillion right now – is sitting on some $150 billion in cash. That's much more than the current capitalization of Nokia which is below $25 billion as of this moment. Indeed, Nokia used to be 10 times more valuable more than a decade ago – and Apple has a unique opportunity to buy something that can be claimed "its predecessor" for a negligible amount of money (a situation that won't necessarily last forever). Just to be clear, at the current stock prices, 51% of Nokia is below $12 billion right now.

Similarly, the current capitalization of Ericsson is 280 billion Swedish crowns which is $29 billion. Cisco is sitting at this exact amount of cash so it may easily buy 1/2 of Ericsson. Clearly, while buying a huge fraction of the stocks, the price would go up. The U.S. government has a lot of money and interest for this transition to take place.

So if you read TRF, Dr Barr, my proposal is:
  • Find the two companies that were called Apple and Cisco in this blog post
  • Agree with them that they will buy 51% stakes in Nokia and Ericsson, respectively
  • When they get these stakes, the U.S. government will reimburse 80% of their expenses they had to pay on top of the price of the stakes according to the current stock prices – so that the U.S. government pays for most of the forcing 51% to sell but the companies are still motivated to buy cheaply, before a deadline that isn't too far (end of H1 2020, for example)
  • The U.S. government will get something for that money – it will insert controlling supervisors into the 5G hardware through 5G protocol-related parts of the business of Apple and Cisco to make sure that 5G in these companies is evolving in agreement with the U.S. strategic interests
  • On top of that, the U.S. government will be able to order 5G-related solutions at profit margins that are bounded from above from the beginning – while the two companies will still compete with each other to make sure that one doesn't abuse its monopoly within the Western companies
Even with the expected increase of the stock prices, the U.S. government would pay just tens of billions of dollars. The strategic importance of someone's control over major 5G solutions is arguably vastly more valuable than that.

You know, lots of the data will be transmitted by 5G – up to 100 times more than what we normally transfer today by the mobile data today. This will unavoidably create some new usage, new kinds of data revealing much deeper levels of privacy etc. It may be very helpful for many things – jobs done (and cars driven) remotely and other things – but the potential to abuse such things will be significant, too.

Some massive "adult" U.S. supervision with lots of cash is also desirable for the plan to catch up with Huawei. Many people who know something estimate the technology of Huawei to be roughly 1 year ahead of both Nokia and Ericsson. I personally believe those estimates. The West surely has the talent to make this gap shrink relatively quickly but I think that it can't happen in the context of modest companies in medium-size Nordic countries, companies that are sometimes accused of provincial thinking and corruption.

Disclaimer: I am long Nokia. I've had two Nokia phones but now I only have a Huawei tablet LOL.

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