Microsoft’s Nokia deal dents hedgies

Oliver Smith
Follow Oliver

US COMPUTING giant Microsoft’s surprise deal to buy Nokia’s mobile devices arm for €5.33bn (£4.5bn) yesterday delivered a nasty shock to the hedge funds who had been short selling the Finnish firm’s stock.

Nokia’s share price rose 40 per cent after the announcement yesterday, a jump caused by the high number of short sellers, typically hedge funds, who were desperately trying to exit their loss-making positions.

US Discovery Capital Management was one of the largest hedge funds hit, holding positions on 2.26 per cent of Nokia’s shares. Viking Global Investors, Maverick Capital, Blue Ridge Capital and Lone Pine Capital also featured among the biggest shortsellers.
The deal will give Microsoft control of Nokia’s Lumia devices, which currently make up four per cent of the global smartphone market.

“We need more combined muscle to break through to consumers. We are a challenger, we will be recognised as an even greater challenger tomorrow,” said Stephen Elop, who is stepping down as Nokia’s president and chief executive to become vice president of devices and services.

Microsoft’s move to bolster its mobile range came as a shock to investors who had been taking advantage of loss-making Nokia’s downbeat performance in recent times.

Short sellers typically borrow stock to sell on the market, and after a number of days the short seller will have to buy the stock back and return it, pocketing the difference in price.

The so-called short squeeze caused by the Microsoft deal cost as much as £540m for those sellers caught in the mix. Nokia’s stock was one of the most shorted in Europe, with 12 per cent of the stock out on loan before yesterday.

“This short squeeze highlights the risk of large short positions in stocks which become ‘takeover’ targets,” said financial information firm Markit.

A source close to the deal told City A.M. that the relatively small number of external advisers helped keep the deal under wraps until the announcement, despite around 50 Nokia board meetings and months of talks between Elop and Ballmer on the details of the tie-up.

The firms used one bank each, in stark contrast to Monday’s long-rumoured £84bn Vodafone deal with US telecoms firm Verizon, which was advised by eight external advisors.

“There is still much to resolve if the acquisition is really to have meaningful impact. While Microsoft and Nokia have jointly been increasing the money flow through the Windows Phone marketing faucet of late it will take mega bucks to take on Apple and Android head cheerleader Samsung for marketing volume and volume shipments,” said analyst Tony Cripps of Ovum.

Nokia’s share price closed up 33 per cent yesterday at €3.97, while Microsoft fell 4.5 per cent to close at $31.88.