When AT&T recently awarded a $14 billion contract to Ericcson, removing Nokia as a key 5G vendor, most concluded the contract was granted not due to technical prowess but rather for purely financial reasons.
Before proceeding, let’s ask a simple background theoretical question. Is $25 million in annual tax revenues for the government of Finland worth sinking the country’s economic crown jewel, Nokia? A company that generates more than $500 million in annual tax revenues for Finland and has a market value of $18 billion.
The following analysis may indeed reveal a key financial factor in AT&T’s decision and the real reason why Nokia stock is languishing. This will be followed by a win/win/win proposal for the Finnish government, Nokia and Solidium, the Finnish backed state investment firm and Nokias second largest shareholder.
Something dramatic happened to Nokia in 2021 and 2022, as reflected by its stock price. This was long before the loss of the AT&T contract in late 2023 and well after the loss of the Verizon contact in 2020. In 2021 and 2022 Nokia was making significant product related progress on many fronts and its turnaround strategy was strong.
Yet Nokias stock, as shown in the following chart, moved in the opposite direction, declining almost 50 percent. This makes Nokia, whose current stock market value is approx $18 billion, vulnerable to a takeover or structured decline in its long-term prospects.
A corporate raider would immediately transfer its $4.5 billion pension surplus and $3 billion in deferred tax assets to its partners, cutting its acquisition cost by 40 percent. Also exposed are Finland’s significant employment based taxes paid by Nokia employees.
AT&T is of course the largest US based telecom company with almost 250,000 employees and more than 200 million subscribers. Its deep connections to government and government contracts might even lead some to see it as quasi governmental.
Perhaps the real choice for AT&T was between the nation of Sweden, Ericcson’s home country, and that of Finland, where Nokia is based.
Here is why:
- A large number of investors in both Ericcson and Nokia are based in the United States, which is of course AT&T’s home country. The US is the largest and most profitable market for both companies.
- Sweden taxes US investors a flat rate of 15 percent on dividends while Finland levies a tax of 30 percent on all dividends paid, even if such investments are held in a tax deferred pension account. Finland rasied this rate from 15 to 30 percent starting in 2021. In comparison, Canada exempts retirement accounts from taxes on dividends paid by Canadian companies.
- There is no exclusion or foreign tax credit available for dividends paid to US based retirement accounts including IRA’s, public and private pensions. These retirement funds and other tax exempts are now the largest pools of potential investment capital, capital that isn’t much interested in Nokia even though Nokia has strong fundamentals. Why would these fund managers, including large Canadian pensions, consider Nokia in this tax scenario? What would Einstein say? (Details provided later)
- A foreign tax credit is available for investors in non-retirement accounts, although this credit usually results in roughly only half the tax paid being recouped due to income limitations on the credit imposed by the IRS (Internal Revenue Service).
- The key point is that nothing exists for retirement and other tax exempt accounts. Some claim that a refund from the Finnish government lowering the rate to 15 percent can be obtained by a lengthy administrative procedure taking several months. Yet even if true, the notion that investors would be willing to navigate this given numerous other portfolio concerns is unlikely.
- This means that after the 30 percent tax on dividends and another combined federal and state tax of 35 percent when the US retirement funds are distributed as ordinary income, coupled with the combined ADR fees charged on dividends of roughly 8 percent of dividends, not much income is left for US based investors. So how does Nokias product sales rep competing for the AT&T contract address this concern? Einstein might have an idea.
- One could argue that Nokia should simply discontinue paying dividends yet that contradicts the most basic tenet of investing and related share value. This tenet is that what drives share values is earnings and the purest manifestation of earnings are a dividend.
Wouldn’t you love to be the Ericcson sales rep, if indeed there were no differences in product quality?
Nokia Realizes One-Third of Its Revenues from the United States, where 13 percent of Its Employees are Based
You might ask AT&T, whose largest customer is the US federal government, in addition to more than 200 million customers who are US citizens first and then ratepayers, why they would even consider Nokia when the government of Finland punishes US based investors, its largest investment base, with a 30 percent up front withholding tax on dividends for investing in Nokia? Even though the US provides almost $8 billion in Nokia’s annual revenues. Sweden based Ericcson imposes only a 15% withholding tax on dividends paid to US based investors.
Canada offers a good model in which dividend taxes are waived for US based retirement accounts. And this is exactly how the Finnish government can ensure Nokia remains strong and based in Finland. Immediately pass legislation effective January 1, 2024 to stop taxing dividends paid to US based retirement accounts. This will allow Nokia to tap a vast pool of potential investors, many of whom are solid long term oriented investors including large US based tax exempt pensions and foundations.
Who Exactly Owns Nokia?
Nokia reports that 22 percent of its shareholders are Finnish and 78 percent non-Finnish. Its largest Finnish shareholder is state backed Solidium at 5.5 percent of total shares. It also notes that Blackrock owned 6.2 percent of total shares on December 31, 2022 while overall US based investors own 15 percent of Nokia.
In comparison, US based investors own more than 27 percent of Ericcson, even though Ericcson has a little “side hustle” fleecing its own US based shareholders as summarized in the following paragraph from Ericcson’s own SEC filed 20-F. This should be another scandal for Ericcson.
“Effective January 2019, Deutsche Bank agreed to pay Ericsson an amount equal to a fixed percentage of the net revenues, if any, collected by it as a result of charging ADS holders issuance and cancellation fees, and dividend processing and annual servicing fees. In 2022, such amount totaled approximately USD 11.9 million.” Of course Deutsche Bank can pay this because investors are paying inflated ADR fees.
This next table shows an overall breakdown of Nokia share ownership based upon size of holdings. It is noteworthy that 23 investors control almost 90 percent of the company.
Breakdown of share ownership at 31 December 2022(1)
| Number of | % of | Total number | % of | |
| By number of shares owned | shareholders | shareholders | of shares | all shares |
| 1–100 | 62 259 | 26.12 | 3 050 629 | 0.05 |
| 101–1 000 | 109 230 | 45.83 | 48 557 985 | 0.86 |
| 1 001–10 000 | 58 824 | 24.68 | 183 833 261 | 3.26 |
| 10 001–100 000 | 7 547 | 3.17 | 186 194 111 | 3.31 |
| 100 001–500 000 | 393 | 0.17 | 75 445 465 | 1.34 |
| 500 001–1 000 000 | 43 | 0.02 | 30 630 857 | 0.54 |
| 1 000 001–5 000 000 | 40 | 0.02 | 105 494 319 | 1.87 |
| Over 5 000 000 | 23 | 0.01 | 4 999 090 949 | 88.76 |
| Total | 238 359 | 100.00 | 5 632 297 576 | 100.00 |
US Investors Hold 866 million Shares, A Decline of 22 percent from 2021
At 31 December 2022, a total of 866,842,784 Nokia shares or approximately 15.4% of shares were outstanding are held of record in the United States.
As of 31 December 2021, a total of 1,112,307 568 shares or approximately 19.6% of the total shares were outstanding and held of record in the United States.
This change from 2021 to 2022 represents a significant decline of ownership among US based investors.
Nokia Has An Ideal Anti Takeover Measure and Need not Worry about Attracting a Larger Share of Foreign Ownership
Nokias articles of Association contain the following clause, a simple and beautiful way for the government to veto any takeover attempt. The bad news is that this clause coupled with the current dividend policy has likely cut Nokias stock in half, as dramatized by the 22 percent decline in the share ownership among US investors in 2022 due to the dividend policy.
Source: Nokia SEC 20F
The current dividend policy may be appropriate for most Finnish based companies yet it does not work for Nokia and will likely result in significant job losses and related tax revenues.
If the Finnish government wanted to focus on only Nokia for simplicity, it could craft a policy change that would only apply to NYSE listed Finnish companies, for which Nokia is the only one.
Nokia is Finland’s mother ship of innovation and its loss or demise would reverberate for a decade.
But don’t expect Nokias tax advisors and auditors including Deloitte and Pricewaterhouse Coopers to recommend this. They are also the auditors and tax advisors of record for Nokia’s prime competitors including Ericcson and Cisco Systems.
Cisco is 10 times Nokias size and the dividends paid to retirement accounts by Cisco are not taxed by the government until withdrawn as a distribution. And of course there are also no ADR fees. This tax exemption on dividends and absence of additional ADR fees provide a large structural advantage to Nokia’s major competitors, courtesy of the Finnish government.
In addition, by suppressing Nokias stock, the current policy provides a further competitive advantage with respect to partnering with and acquiring important new technologies and employees.
Thinking that Nokia can do everything in-house in terms of innovation is simply not realistic. Success in technology is all about key partnerships and attracting a few brilliant employees.
What Would Einstein Say to the Finnish Government?
One of my oldest friends father was at Princeton when Einstein was there and had the opportunity to chat with him in the cafeteria. As a young boy I asked my friends father what Einstein was interested in outside of science and he replied, the tax free compounding of interest. That didn’t make much sense at the time yet his interest here was indeed true, as chronicled in leading business publications.
Einstein said “compound interest is the 8th wonder of the world. He who understands it, earns it….he who doesn’t….pays it.” Of course tax deferred retirement accounts offer a dramatic example of this tax free compounding impact.
Exhibit one for Einstein’s claim could be the Finnish government’s current dividend policy for US investors, a new policy that was implemented in 2021. It simply means that over time a US based investor will accumulate 70 percent less assets from dividend payments, assuming a 6 percent annual return.
The great irony here is that the current policy of taxing US based investors pension accounts is self destructive for the nation of Finland. This is because tax revenues from employment are much more significant than a dividend tax on US taxpayers retirement accounts. Not to mention taxes from stock sales, including employee incentive and performance shares.
The entire annual tax benefit to Finland from taxing dividends paid to US shareholders, net of refunds, is clearly less than $25 million.
The Math is Simple
Since US investors have 866 million shares currently, one can assume the current dividend of 12 cents per share results in annual dividends paid of approx $104 million and the related tax revenues, at 30 percent, of $31 million. It would be reasonable to assume roughly 20 percent or $6 million was returned as refunds, leaving $25 million.
The question is… does it make sense for Finland to alienate the largest pool of potential Nokia investors with the current policy when it only generates $25 million a year in tax revenues?
We can already see that in 2022 the percent of Nokia owned by US based investors dropped 22 percent. A massive decline for a single year.
Nokia could open up a vast new pool of potential investors by exempting dividends paid to US investors in retirement accounts. Its stock price would then rise sharply and thereby help stimulate job growth and prevent cost cutting measures resulting in less employment based taxes. Most importantly, this would send a solid message to potential employees, customers and future partners that Nokia is indeed strong.
The top 10 public pensions in the US alone hold more than $1.5 trillion in pension assets. Why would one of these funds consider investing long term in Nokia, even though it could be an ideal long term holding?
TOP 10 Pension Funds in the United States:
(All Public Employee Pensions, Largest is California Teachers)
Are Finland’s Goals Best Met via Employment Taxes?
The three primary Finnish taxes levied are income, municipal and social security and these three taxes combine to be at least 60 percent of wages according to a 2023 Price Waterhouse Coopers Analysis.
It is reported than Nokia has more than 7,000 employees based in Finland with an average salary and bonuses exceeding $85,000. The math is simple: 7,000 employees x $85,000 average wage x a 60 percent combined tax rate yields more than $350 million in annual employment based annual tax revenues for Finland.
Put another way, every 1,000 jobs is worth at least $50 million in annual taxes to the Finnish government. This is likely a conservative estimate and doesn’t include tax on employee stock grants, etc. Nor does it include various fees and other taxes paid by Nokia itself or the multiplier impact from vendors and customers.
Solidium, Nokias Largest Shareholder
(Source: Solidium Annual Report Filed August 2023)
Solidium CEO Reima Rytsola, (Assumed Role August, 2022)
“Solidium is a limited liability company owned by the State of Finland. Its mission is to strengthen and stabilize Finnish ownership in companies of national importance and increase the value of its holdings in the long term. Our vision is for our portfolio companies to outperform their peers in the long term.”
The following table shows Solidiums Holdings and Percent Ownership for Each Company in its portfolio.
It shows that Solidium’s 5.8 percent interest in Nokia represents 16.6 percent of the total assets in its $7.4 billion portfolio. Also noteworthy is that even though 16.6 percent of the portfolio, Nokia is only providing 8.9 percent of the total dividends.
Solidium is a beautifully designed partnership between the Finnish government and industry with its primary mission being to maximize Finland based employment opportunities and related tax revenues.
The purpose of this analysis is to reveal that adopting a more tailored tax policy could result in a a win/win/win scenario for Solidium, Nokia and the government of Finland.
Rather than needing to sell off lower margin businesses like the 5G IOT device business, recently sold for $200 million, which provides important diversification and connections to larger future markets, Nokia could instead keep these valuable jobs and related tax revenue for the Finnish government. The business is being sold to a Canadian based firm.
It was Intel who turned down making chips for the original iphones simply because it didn’t see the short term profit margins as acceptable. Nokia should not fall into this trap and need not if it can achieve a significantly higher share value.
The following photo is from Nokia’s website. Job candidates are encouraged to expand their bubble. Perhaps Nokia financial management and the Finnish government should expand theirs also with respect to attracting more US based investment. Would Einstein invest in Nokia without a change in dividend tax policy?
At its peak in 2000, Nokia accounted for 4% of the country’s GDP, 21% of total exports, and 70% of the Helsinki Stock Exchange market capital. Those days are gone yet today it is a global leader in network infrastructure and the mother ship of innovation for younger Finnish employees who take skills learned at Nokia and start new companies in Finland.
Nokia Offers Share Based Incentives to Employees
With almost 64 million performance and 54 million restricted shares outstanding, 118 million total shares, if Nokia stock were to double to $7 per share, this would translate into compensation of $826 million to Nokia employees. A tax windfall for the government of Finland that would pay for the absence of a dividend tax on US investors for several years.
This compensation generates a valuable tax deduction for a non-cash expense for Nokia while giving employees a significant increase in compensation and the Finnish government more tax revenues from appreciated stock sales.
Most importantly, however, Nokia sends a message to potential investors, employees and partners that it is strong and its stock is a valuable tool in negotiations.
Source: SEC 20-F
“Pension Account” Tax Treatment for US Based Nokia Investors:
The following summary shows three separate dividend payments in 2022 , confirming rate is indeed 30 percent. These taxes are permanent reductions from this retirement account for which there is no foreign tax credit available. Some will say that an investor can use an administative procedure petitioning the government of Finland to lower this to 15 percent, one that takes several months, yet how many CPAs are willing to navigate that, if even indeed the custodians will allow the funds back into the tax deferred account.
Put another way, who do you know with Nokia stock in their pension account who has accomplished this? And why would a large usually short staffed public pension deal with this administrative complication?
Source: Charles Schwab 2022 Year End Investment Account Recap
The current dividend tax policy is undermining Solidiums goal of increasing Finnish employment and related taxes by providing a huge structural advantage to Sweden based Ericcson in addition to US based competitors including Cisco Systems and Juniper Networks, whose dividends are not taxed nor are there ADR like fees charged to retirement accounts for holding investments in these companies.
What Nokia and the Finnish government may not want to accept is that investor behavior is dramatically influenced by tax policies. As a result, they have effectively shrunk the pool of potential Nokia investors, driving the stock price down. A disaster for the government of Finland.
Perhaps the Finnish government was frustrated by large legal and accounting firms devising new schemes to try and cheat the government, creating a policy backlash in 2021?
Now the Finnish government simply needs to be more tactical in its strategy, rather than slowly sinking a vital enterprise like Nokia by deflating its share price.
To those that speculate the company may make an attempt to go private given its deflated share price, as done by Dell years ago, that makes no sense for Nokia.
Not only would Nokia be less competitive in a fast changing tech environment in which share compensation is key, the advantages to Finland of Nokia staying public far outweigh the benefits of going private. In Dell’s case the US government was a big loser given the resulting entity dramatically lowered tax revenues.
Relevant Finnish Govt Officials
Finland is a republic whose head of state is President Sauli Niinistö, who leads the nation’s foreign policy and is the supreme commander of the Finnish Defence Forces. Finland’s head of government is Prime Minister Petteri Orpo, who leads the nation’s executive branch, called the Finnish Government.
The minister of Science Sari Multala has an admirable goal of boosting public and private investment in R&D to 4 percent of GDP yet she could have a chat with the prime minister.
What Niinisto, Orpo and Multala might consider is intently focusing on the future of its economic crown jewel, Nokia. A firm that represents 16.7 percent of State backed Solidium’s assets.
Long term investors in Nokia like myself do not want to see a break up, takeover or outright failure, which would be disasterous for Finnish tax revenues. Those same revenues needed to fund the national R&D goal.
The simple truth is that a company’s stock price does matter in the technology industry because it is seen as a key barometer of future success by potential partners and employees alike. And why would the government of Finland sink a vast vital enterprise like Nokia for only $25 million in annual tax revenues from taxing dividends to US shareholders. And if they think this can not happen, one word, NORTEL.
Recommended Steps and Concluding Comment:
- Suspend dividend tax for US Citizens on all NYSE listed Finnish companies when involving a qualified retirement account. This would only impact Nokia since it is the only Finnish company on the NYSE.
- Move dividend to semi-annual, as done by Ericcson, to reduce the ADR fees charged by Citibank in half.
- Declare a 10/1 reverse stock split to reduce the number of shares outstanding, which will further reduce the ADR fees since they are accessed on a per share and per dividend basis.
Conclusion
The math is simple and recommended changes will result in US based Nokia investors having 70 percent more assets in their retirement accounts resulting from dividend payments. And of course the share price would then increase.
Trust Einstein rather than the legion of economists, math phd’s and so called investment professionals at Citibank, Deloitte, Pricewaterhouse Coopers and other leading advisory firms whose real interest is to fleece Nokia and then carve it up and earn a 200-300 percent return in 3 years.
In the 1980’s many firms thwarted takeovers by taking on debt to appear less attractive. Later others like Nike and Facebook use two classes of stock to maintain control. Many more like Eaton did tax inversions , becoming UK based PLC’s because if they didn’t a takeover firm would have done it and carved them up.
Business is tough and competitive yet for Nokia and Finland one might call this policy change low hanging fruit.
