(Originally published here.)
In the popular imagination, Apple Inc. is the leading maker of premium smartphones, Samsung Electronics Co. comes in at a respectable second place and all other contenders hardly register.
One of these also-rans is Nokia Oyj, the Finnish company that used to make half of the world’s mobile phones but recently felt compelled to sell that money-losing unit to Microsoft Corp. Apple, meanwhile, is the world’s most valuable company. Nokia’s failure to compete is all the more remarkable because its latest smartphone is technologically superior to Apple’s newest model.
Despite these radically different fates, savvy investors hold both companies in poor esteem when it comes to the management of financial resources.
Bloomberg News reports that Third Point, the hedge fund run by Daniel Loeb, bought a large stake in Nokia shortly after it agreed to off-load its consumer business to Microsoft. While the firm’s investor letter details several reasons for taking the stake, it notes that Third Point expects Nokia to pay out some of its cash hoard — about 8 billion euros after netting out the company’s debt — to shareholders. That sounds very similar to Carl Icahn’s rationale for buying a stake in Apple earlier in the year.
In general, activist investors such as Loeb and Icahn often ask (and then demand) that companies dispose of their large cash piles by handing them back to shareholders. This is a perfectly reasonable request to make of companies that are doing a bad job of managing their resources. Businesses are supposed to invest in new products and sell them at a profit. Anything else is wasteful. If the managers can’t come up with any constructive uses of their tens or even hundreds of billions of dollars of cash on hand, they should give it back to people who can allocate that capital more effectively, whether it’s the widow and orphans fund or Loeb and Icahn. After all, if I want to accumulate low-yielding short-term assets I can do it myself with far less risk than buying shares of a tech company.
Apple may have crushed Nokia in the business of selling consumer devices, but the two companies have something in common that neither would like to admit.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)