Nokia Acquisition of Sierra Wireless

Mergers & Acquisitions (BA 6074)

Professor Jeff Allen Spring 2015

Lisa Burks
Ramesh Chandraprakasam
Drew Congdon

table of contents
Executive Summary
Deal Structure
Acquisition Rationale Overview
Nokia Positioning
Sierra Wireless Overview
Sierra Wireless: A Market Leader in M2M through Acquisitions
Industry Overview, Trends, Key Players, Competitive Landscape, Market Position
Internet of Things (IoT) / Machine to Machine (M2M)
Cloud Computing
Location Based Services
Mobile Virtual Network Operator (MVNO)
Mobile Network Technology and Operators
Potential Risks and Challenges
Target Valuation
Detailed Cash Flow Forecast
Enterprise Value
Calculating the Cost of Capital
Combined Firm Valuation Bridge
Comparables Analysis
Sensitivity Analysis
Appendix
Nokia: A Unique History of Reinvention
Nokia: List of Acquisitions
Sierra Wireless: Pro-forma
Sources for Valuation and Financial Analysis

3
4
5
6
7
8
9
12
13
14
15
16
17
18
19
20
21
22

24
25
26
28

Executive Summary
Nokia to Purchase Sierra Wireless for $1.3B
Executive Summary
The acquisition of Sierra Wireless is a strong
strategic fit to accelerate Nokias growth in
mobile connectivity for the Internet of Things
(IoT) and to broaden Nokias customer base.
Sierra Wirelesss device-to-cloud strategy,
market leading M2M connectivity and
managed services combined with Nokia
Networks LTE expertise, HERE mapping
business, and global footprint create a
technology platform that will:
Increase Nokias market expansion
through Sierras network of top-tier
customers and a proven technology
platform
Position Nokia into an internet-connected
mobile communications solution leader
Broaden (IoT) product offerings by
combining technologies of both the
companies
The IoT market is estimated to grow up to 75
billion connected devices by 2020 at an
estimated $2.5T in global economic value.
Critical to capturing this value is having the
technology that provides reliable, scalable and
secure networks to manage data transmission
by billions of objects and sensors. Nokia can
become an IoT market leader through
acquisition of Sierra Wireless.
Economic Rationale
Nokia will benefit from both revenue upside
and synergies to realize increased enterprise
value of the firm by 31%. Internet of Things
and Cloud Services will primarily drive
increases in revenue. Elimination of royalty
payments and overhead costs are the synergy
drivers.

Sierra Wireless has over 550 patents and a

leader in M2M technology with product
positioned for smart metering, automotive
telematics, fleet management and other
enterprise markets. Sierra would enable Nokia
achieve one of the its key strategic goals of
becoming a leader in Internet of Things (IoT)
market and also expanding to markets outside
of Nokias traditional telecom operators.
Strategic Rationale
Expand Nokias product offerings by
utilizing Sierras M2M technologies
Accelerate Nokias market access for target
products
Utilize Sierra Wireless competitive
advantage
Improve performance of Sierra Wireless
Conclusion
Sierra Wireless has spent the last 10 years
building a network of intelligent devices. Nokia
Networks is building a special 5G network
(called LTE-M) focused on Machine-to-Machine
needs.
Through Nokias Liquid Radio
Technology and their advanced LTE network,
Nokia has positioned its network to handle the
explosive growth expected.
By acquiring the Sierra Wireless Intelligent
Wireless Solutions and expanding product
solutions offered, Nokia will be able to protect
its core competencies continuing to be a global
leader in Mobile Broadband Networking but will
once again adapt to reinvent itself in order to
capture global market share in the
programmable world of the Internet of Things.

Deal Structure

Sierra Wireless Inc. (SWIR)

$38.42 (as of 2/15/2015)

The Offer

The Initial Offer

Offered price/share
Outstanding shares
Total offered price
plus debt
less cash
Net Equity Value
Cash
Debt

$43.00
31
$1,333.12
$31
$ (239.83)
$1,124.29
$839.87
$284.43

The recommendation is for Nokia to

make an initial offer to acquire Sierra
wireless at $43/share. This represents
12% premium over the Feb 25,2015
closing price of Sierra.
The deal structure is recommended
with 25% debt and 75% cash financing.

Sources of Funds
$840M of Nokias cash from balance sheet should be used for the cash
portion and $285M of debt at Treasury rate + 300 bps
Free Cash Flow projection

Free Cash Flow - Forecast

140.0
120.0

millions

100.0
80.0
60.0
40.0
20.0
0.0
-20.0

2015 E

2016 E

2017 E

2018 E

2019 E

-40.0

The Maximum Offer

Offered price/share
Outstanding shares
Total offered price
plus debt
less cash
Net Equity Value
Cash
Debt
4

$50.00
31
$1,548.33
$31
$ (239.83)
$1,339.50
$1,055.07
$284.43

While overall value could reach

$57/share based on optimistic
estimate, Nokia needs to retain and
capture economic value and upside
from the acquisition.
The maximum offer price
recommended is $50, which represents
a 30% premium over Feb 25, 2015
closing price.

Rationale Overview
Aligns with Nokia Strategy to become a leader in the machine to machine (M2M) programmable world
called Internet of Things (IoT) and capture market share in telco cloud, telecom vendor data analytics and
intelligent location services businesses.
Expand Product Offerings by Utilizing Technology Synergies
Sierra Wireless has over 550 patents and is a leader in M2M technology.
Sierras core business units allow Nokia to insource their use of wireless
gateways, routers, and embedded wireless modules, which will expand
Nokias footprint reducing the need to rely on competitor components while
capturing more of the IoT revenue stream. Sierras domination in the car
module industry can reduce HERE mapping displacement.

Accelerate Market Access for Target Products

Sierra Wireless has invested heavily in intelligent devices, gateways and
secured cloud services. Riding Nokias 4-billion subscriber network
infrastructure would accelerate product market access. Its recent purchase
of Wireless Maingate (MVNO) provides further vertical integration as well as
market penetration.

Utilize Acquirers Competitive Advantage

Nokias 5G network is paving the way for a programmable world. Sierra
Wireless focus on intelligent devices and secure cloud communication can
be first in class running on Nokias network infrastructure. As Mobile
Network Operators (MNOs) move away from 2G/3G technology, Sierra could
be positioned to be best in class riding on 4G/5G networks.

Improve Performance of the Target

There are 16 billion connected devices today (up 20% from 2014) which
estimated to grow to 75 billion by 2020. Nokia has focused on the core
network infrastructure while Sierra Wireless has focused on the gateways
that connected the devices to the mobile networks primarily riding 2G and
3G networks. Packaging the two will enable seamless integration for M2M
connectivity.

Source: http://nokia.com

NOKIA
POSITIONING
VISION;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;;
Regarding a Programmable World

Nokia aims to capitalize on Nokias mobile network knowledge and strong

relationship with operators, HEREs expertise in location services and
connected cars, and Nokias Technologies insights and innovations in sensors
Nokia is committed to growing both organically and via acquisitions to
improve shareholder value and profitable deployment of the cash reserves.

NETWORK INFRASTRUCTURE

LOCATION BASED SERVICES

ADVANCED TECHNOLOGIES

Mobile Broadband

Geolocation Services

Nokia Innovations

Nokia serves over 4 billion subscribers

As a global leader in cartography, HERE

Nokia continues to invest billions of

providing Mobile Network Operators

maps are found in 80% of all North

dollars into research and development

such as Bharti Airtel, China Mobile,

American and European cars with in-

dedicated to developing and licensing

Deutsche Telekom, NTT DoCoMo,

dash navigation.

cutting edge innovations that are

Softbank, Sprint, Telefonica, Verizon and

In 2013, more than 10 million new cars

powering the next revolution in

Vodaphone with emerging technology.

were sold with Nokias HERE map

computing and mobility.

technology on board.

This also includes an Invent with Nokia

Nokia has acquired multiple location-

program that is an Intellectual Property

based technology companies over the

crowd-sourcing platform that allows

last ten years and is focused on providing

Nokia to innovate with external

an end-to-end experience for the

companies and individuals who can bring

emerging programmable world market

diverse technology and new ideas to

of connected devices and enterprise

Nokias business contributing to the

solutions.

growth and diversification of its already

HERE has been a global leader in the

vast patent portfolio.

mapping business for over 30 years,

Nokia has 75% of the LTE Network

whose vision is to offer the worlds best

Infrastructure patents. Nokia continues to

maps and location experiences across

be a leader in R&D playing a major role

multiple screens and operating systems.

in the IoT ecosystem design.

Nokia sets the standards bringing the first

ever call on GSM as well as LTE. Nokia
has partnered with KT this month to

develop a programmable world or IoT

ecosystem and has demonstrated the
worlds first 5G-interconnectivity

network for M2M devices. This prototype

is a game changer for wearables,

connected cars and smart grid elements

ensuring more than 10 years batter life
with a vast footprint that can handle
massive sensors even in remote
locations.

Target Overview
OVERVIEW
Sierra Wireless provides cellular wireless
solutions and cloud service to the machineto-machine (M2M) and connected device
markets in North America, Europe and the
Asia Pacific. The company provides leading
technologies to Internet of Things (IoT)
solutions being developed by partners such
as Philips Lighting and Schneider Electric.
Sierra Wireless provides services in two
segments,
Original
Equipment
Manufacturers (OEM) and Enterprise
Solutions. The company operates on more
than 80 networks globally and has shipped
more than 100 million M2M devices
worldwide. Sierras portfolio of wireless
technologies encompasses 2G, 3G, and 4G
LTE embedded modules and gateways. The
OEM segment of Sierras business offers
AirPrime wireless embedded modules and
tools to integrate wireless connectivity into
various products and solutions for OEM
customers. The OEM segment provides its
products and solutions to automotive,
networking, energy, security, sales and
payment,
industrial
control
and
monitoring, fleet management, field
service, and healthcare industries, as well
as consumer electronics, including
computer and tablet manufacturers.
The Enterprise Solutions segment offers
AirLink intelligent gateways, modems, and
tools comprising cloud-based platform for
building, deploying, and managing M2M
applications
to
public
safety,
transportation, field service, energy,
industrial, retail, and financial enterprises.

The Enterprise Solutions segment also

offers AirVantage M2M cloud platform,
providing
scalable
and
secure
infrastructure for M2M applications, as
well as rugged terminals for railway
applications. Sierra Wireless also provides
professional services to OEM customers
during their product development and
launch process. Sierra Wireless has more
than 900 employees worldwide.
CUSTOMER SEGMENTS
Sierra Wireless, Inc. sells its products and
solutions directly, as well as through
various indirect channels, such as OEMs,
mobile network operators, distributors,
and value added resellers. Customers
include OEMs and device manufacturers
that develop M2M and connected device
solutions as well as wireless network
operators providing integrated M2M
solutions for applications such as traffic
and fleet systems, in-vehicle telematics,
video
surveillance,
smart
energy
management, and transaction payment
services. Key customer channels:
Home consumers
Mobile employees
Law enforcement personnel
Utility workers
Personal vehicle owners
Commercial drivers
Health care professionals
Utilities
Other enterprises

Officers and Directors

Charles E. Levine

Chairman of the

Jason W. Cohenour

President, CEO,

Board

Industry
Leader
Machine to
Machine

Director
David G. McLennan

VFO, Secretary

August Daniel Schieler

SVP, GM

Emmanuel Walckenaer

SVP, GM

- OEM Solutions

- Enterprise

VERTICAL MARKET INDUSTRIES

Mobile Consumer * Consumer products Automotive
* Railway * Healthcare
Transportation & Fleet Management
Industrial & Infrastructure * Security
Networking * Sales & Payment * Energy
Field Service & First Responders

Solutions, Regional
General Manager,

SIERRA
WIRELESS ACQUISITIONS
EMEA
Jason L. Krause

SVP Corporate
Development and
Marketing

Bill G. Dodson

SVP -

Operations
Philippe Guillemette CTO
Thomas Sieber Director
Gregory D. Aasen

Independent

Director

2003: Air Prime Acquisition

8

Internet Of Things
Industry Trends

Although the idea of a "Jetsons" lifestyle has been around since the 60s,
having a programmable world has not been in the forefront of technical
industries. The focus on the Internet of Things (IoT) has created an
"explosion of possibilities" with technology companies such as Nokia and
Sierra Wireless facing new challenges.
Explosive Growth of Connected Devices
Excessive Connections overloads Networks and RF Spectrum
Drains Battery Life of Connected Devices

In 2012, there were 8.7 billion devices with

expectations of numbers as high as 75 billion in 2020
with over 200 different unique types of devices
ranging from oilrig or railway-monitoring devices to
kindles or connected cars.
Each of these connected, location-sensitive devices
has sensors that frequently send very small amounts
of data across the network to a central location. This
drains the battery life of the connected device and
uses the cellular networks to transmit the data via
finite and limited RF spectrum.
http://blog.neteon.net/the-4-tm2mhings-you-need-to-know-about-machine-to-machine

Internet Of Things
Key Players

10

`Source: http://news.ne2ne.com/articles/share/1032521/

Internet Of Things
Competitive Landscape

Sierra Wireless operates in a hyper-competitive high-growth industry, such as the Internet of Things (IoT).
As expected, Sierra Wireless is spending heavily to grow their market share before the industry matures. To
support this position, Sierra Wireless has been acquiring machine-to-machine (M2M) companies that also
expands their solution portfolio and increases their direct competition. Today, Sierra Wireless competes
directly with key providers of wireless communication hardware, software, and cloud and connectivity
services such as Kyocera Communications Inc., Novatel Wireless Inc., Sony Mobile Communications Inc.,
ARRIS Group Inc., Ericsson, Motorola Solutions, and Nokia Corporation.

Internet Of Things
Market Position
Sierra Wireless
Market Capitalization
2014 Revenue
2014 Net Income/Loss
Gross Profit
EBITDA
Combined Cash
Cash Flow from Operations
Total Liabilities

1.224 B
605.8 M
(18.6 M)
213.6 M
27.6 M
239.8 M
(50.5 M)
183.9 M

Nokia has purchased 11 companies

specializing in social networking and
mapping. This coupled with their network
technology position gives them a strong
market position.
Note: Financial breakdown of IoT is not
available.

11

Cloud Computing
Industry Trends

With improved transmission speeds as well as the invention of the iPhone, wireless data usage and dependence on cellular
networks has soared. This has spurred development in many different areas including:
1) Network Optimization Efficient ways to deliver data using limited spectrum
2) Faster Speeds Faster data through new technologies Wireless WAN (WWAN), LTE (2G through 5G progression)
3) Data Hosting & Storage Video streaming has placed more dependency on the need for location-based cloud delivery
4) Security Ensuring wireless transmissions are secure via network-based firewalls and other security enhancements
Now that Cloud Computing and wireless data transmission is not only feasible, but also is quick, secure, and reliable, the high
costs of cables to remote areas are no longer required.

Cloud Computing
Key Players
Akamai
Amazon
Apple
AT&T
BMC Software

Citrix
Dimension Data
Dropbox
Google
HP

IBM
Microsoft
Netsuite
Oracle
Rackspace

Salesforce
SAP AG
Savvis
Terremark/Verizon
VMWare

Sierra Wireless Position

Sierra Wireless doesnt show as a key player
primarily because the cloud implies large
volumes of data storage where as M2M
devices typically use 1MB per month.
However, the AirVantage product is a key
component to Sierras success.

Nokia Position
Nokia is driving Telco Cloud innovation to become a leader in enabling telecom customers to reduce
costs and operate more efficiently with virtualization and reduced hardware footprint.

12

Location-based Services
Industry Trends

Although Garmin and Bing use HEREs Navteq technology, there is a growing trend for the casual user
to just use the mobile phone for GPS. With costs of 100s of dollars to keep GPS maps in car navigation
systems accurate, it is hard to compete with a cellphone that is portable and up-to-date and free for
everyday use. However, Google announced that they are charging for more than 25000 maps per day,
which should allow Nokia to keep the market share for M2M devices and big application users like Bing
and Garmin.

Sierra Wireless Market Position

Sierra Wireless is currently the #1 player in
deploying wireless modules into automobiles.
Their modules are currently deployed in Toyota,
BMW, Ford, Chrysler, PSA Peugot Citron,
Mercedes and Fiat models. Their acquisition of
Wavecom further strengthens this position
adding OnStar (a General Motors subsidiary).
Even Teslas model S electric car uses Sierra
Wireless to connect to the AT&T network in the
US market. Sierra has also partnered with to
enable insurance companies like State Farm to
offer in-vehicle safety and diagnostics programs.

Nokia Market Position

Although Nokia is losing market share to Google
for smart phone and computer mapping usage,
Nokia continues to be a leader in location-based
services through extensive R&D and through
connected cars using integrated or standalone
Garmin GPS technology.
According to SeekingAlpha.com, 7% of Nokias
Revenue (969M in 2014) is generated from the
HERE segment annually.
The transition to connected car modules and
ease of application integration could quickly
reduce Nokias market position.

13

Mobile Virtual Network Operators (MVNOs)

Industry Trends

A Mobile Virtual Network Operator

(MVNO) is a wireless solutions service
provider that relies on mobile network
infrastructure technology (purchased at
wholesale rates from Mobile Network
Operators (MNOs)).
These companies incur no significant
capital expenditure on spectrum and
infrastructure and can just skim profits off
the top rebranding the service as their
own.
M2M MVNO companies provide overthe-top content in this case M2M content
-- using the underlying network to provide
secure connectivity. Entry into the MVNO
market was a growing trend peaking in
2006 but has died down with more mobile
operators entering the M2M space.

Sierra Wireless Market Position

Sierra Wireless just purchased Wireless Maingate one of two MVNOs in Sweden and Finland, which connects
their intelligent product line to their secure cloud product line. Through its distribution channel, it serves:
55% of all smart meters in Sweden
20% of all smart meters in Finland
70% of all mobile payment terminals in Sweden
40% of all residential alarms in Sweden
Sierra also distributes directly with M2M solution provided and Value Added Resellers (VARs).

Nokia Market Position

MVNOs utilize the underlying network infrastructure of the mobile carrier. Nokia does not currently have any
revenue generated via over-the-top services such as M2M device usage revenue.

14

Mobile Network Technology and Operators

Industry Trends

Top Network Infrastructure Companies

Huawei
Nokia Corporation
Ericsson
Alcatel-Lucent
If you look at those who are actively doing
R&D towards LTE, you find a mix of players.

Largest Network Operators

(based on FY 2012)*
China Mobile
Vodafone Group
America Movil Group
Telefonica Group
China Unicorn
Verizon Wireless
VimpelCom Group
Orange Group
Bharti Airtel Group
AT&T Mobility
China Telecom
Deutsche Telecom
MTN Group
Telenor Group
Telecom Italia Group
NTT DOCOMO
Sprint Nextel
Sistema Group
Telkomsel
Au (KDDI)

Connections
(in millions)
726.31
381.75
262.91
247.31
250.71
114.45
211.86
140.20
259.84
107.25
168.03
111.10
153.53
145.25
103.09
61.54
55.21
106.12
120.61
37.71

YoY
Growth
8%
6%
3%
16%
5%
4%
28%
7%
3%
19%
4%
13%
-2%
3%
2%
-2%
-8%
9%
7%

*Order based on connection & revenue position

Sierra Wireless Market Position

Sierra Wireless partners with Network Technology & Mobile Network Operators but does not play in this space
directly. They build gateways, embedded wireless modules and modems.

Nokia Market Position

Nokia is the worlds second largest player in the wireless broadband infrastructure market providing wireless
networks solutions and services to the cellular operators around the world. In gateway equipment, Cisco is the
clear market leader.

15

Potential Risks and Challenges

Litigations with Sierra Wireless

Nokia has been at the forefront of mobile technology since the beginning. In fact, all Wi-Fi devices pay royalties to
Nokia, which also has standard essential patents (SEP) for 2G-5G technologies. Sierra Wireless pays millions each
year in royalties. In 2013, Sierra Wireless accused Nokia Corporation of applying widely different, and therefore
unfair royalty rates and requested that the European Commission as well as the US Federal Trade Commission
investigate. If Nokia acquires Sierra Wireless, there may be clashes of culture as well as a mass exodus of talent.
Nokia would also no longer receive royalties from one of the larger M2M players.

Embedded Sierra Wireless base of 2G connected devices

Mobile Network Operators are beginning to decommission 2G networks in order to reuse the limited RF spectrum.
AT&T, for example, plans to shut down its 2G network on December 31, 2016. Approximately 80% of all connected
devices use less than 1 MB per month. Most M2M equipment provides data over 2G networks. Sierra Wireless
launched the first cellular embedded module in 1997 and has since shipped over 100 million devices, many of which
only run on 2G networks. M2M companies must upgrade equipment or switch to mobile operators that will
continue to support 2G service which could lead to a loss in market position.

Strain on Key Partnerships with OEMs, MNOs, and MVNOs

Nokia signed a huge deal with KT (Korea Telecom), a large player in the connected home space, and KT is also
competitor with Sierra Wireless. Although Nokia would be helping set the standards for infrastructure and
communication methodology, other large Original Equipment Manufacturers (OEMs), vendors and key partners
may fear the competitive advantage it would give Nokia/Sierra in the M2M/IoT market

Difficult to Integrate
Integration may be difficult between Nokia and Sierra Wireless, especially in the areas they may overlap differently
like Cloud Computing. Nokia has focused on the Telco Infrastructure problems providing promising relief to traffic
delivery congestion needs whereas Sierra Wireless focused on a simple, scalable and secure cloud for transmission of
their products.

16

Target Valuation

Assumption: 2015 and beyond revenue growth forecast was

based on wireless industry articles (source: http://www.fool.ca)

Cash Flow Analysis

Created based on three scenarios

With Synergies

Annualized Growth: 15.7%

Terminal Growth: 2.00%

Base Case Scenario

(in millions)
Revenue
COGS
Gross Profit
Net Profit
plus Deprecriation
less Increase (+ decrease) NWC
Cash Flow from Operations
less Capex
Free Cash Flow
Terminal Value
Total Free Cash Flow
PV of Cash Flows

2010 A

2011 A

358.0
236.6
121.4
-14.5

2012 A

333.2
231.4
101.7
-29.3

2013 A

397.3
272.1
125.3
27.2

2015 E
701.1
434.7
266.4
23.8
20.7
-41.0
3.5
-28.0
-24.5

2016 E
811.3
486.8
324.5
44.1
24.4
-40.4
28.1
-33.0
-4.9

2017 E
938.9
544.6
394.3
89.3
28.6
-41.8
76.0
-38.6
37.4

2018 E
1086.5
608.5
478.1
118.0
33.2
-42.2
109.0
-44.8
64.2

-24.5
6/1/2015

-4.9
6/1/2016

37.4
6/1/2017

64.2
6/1/2018

2019 E
CAGR ('15 -'19)
1257.4
15.7%
691.6
565.8
145.1
50.8%
35.8
-13.8
167.2
-48.4
118.8
1588.1
1706.9
6/1/2019

$1,124.29

Annualized Growth: 20.0%

Terminal Growth: 2.00%

Optimistic Scenario
2010 A

358.0
236.6
121.4
-14.5

PV of Cash Flows

Without Synergies
Base Case Scenario

605.8
392.2
213.6
-18.6

-839.9
6/1/2014

Higher Revenue Growth

(in millions)
Revenue
COGS
Gross Profit
Net Profit
plus Deprecriation
less Increase (+ decrease) NWC
Cash Flow from Operations
less Capex
Free Cash Flow
Terminal Value
Total Free Cash Flow

2014 A

441.9
296.2
145.6
55.0

COGS Synergies: 3.00%

SGA Synergies: 5.00%

2011 A

333.2
231.4
101.7
-29.3

2012 A

397.3
272.1
125.3
27.2

2013 A

441.9
296.2
145.6
55.0

2019 E CAGR ('15 -'19)

1507.5
20.0%
829.1
678.4
174.0
56.4%
36.7
-14.1
196.6
-49.6
147.0
2150.2
-839.9
-23.6
-7.3
43.5
81.2
2297.1
6/1/2014 6/1/2015 6/1/2016 6/1/2017 6/1/2018 6/1/2019
2014 A

605.8
392.2
213.6
-18.6

2015 E
727.0
450.7
276.3
24.7
20.7
-41.0
4.3
-28.0
-23.6

2016 E
872.4
523.4
349.0
47.4
24.8
-46.0
26.3
-33.6
-7.3

2017 E
1046.9
607.2
439.7
99.5
29.3
-45.8
83.1
-39.6
43.5

COGS Synergies: 3.00%

SGA Synergies: 5.00%
2018 E
1256.2
703.5
552.7
136.5
34.0
-43.3
127.2
-46.0
81.2

$1,558.30

Annualized Growth: 15.7%

Terminal Growth: 2.00%
Sierra Cost of Capital: 9.63%

(in millions)
2010 A
2011 A
2012 A
2013 A
2014 A
2015 E
2016 E
2017 E
2018 E
2019 E
CAGR (2015-2018)
Revenue
358.0
333.2
397.3
441.9
605.8
701.1
811.3
938.9
1086.5
1257.4
15.7%
COGS
236.6
231.4
272.1
296.2
392.2
455.7
527.4
610.3
706.3
814.1
Gross Profit
121.4
101.7
125.3
145.6
213.6
245.4
284.0
328.6
380.3
443.3
Net Profit
-14.5
-29.3
27.2
55.0
-18.6
28.0
40.6
56.3
76.1
100.6
40.1%
plus Deprecriation
19.7
23.2
27.2
31.5
34.0
less Increase (+ decrease) NWC
-26.9
-26.5
-27.4
-27.7
-9.0
Cash Flow from Operations
20.8
37.3
56.1
79.9
125.6
less Capex
-20.4
-22.8
-26.7
-31.0
-33.5
Free Cash Flow
0.4
14.5
29.4
48.9
92.1
Terminal Value
1231.6
Total Free Cash Flow
-839.9
0.4
14.5
29.4
48.9
1323.7
6/1/2014 6/1/2015 6/1/2016 6/1/2017 6/1/2018 6/1/2019
PV of Cash Flows
904.5

17

Target Valuation
Cash Flow Analysis

With Synergies
Base Case Scenario

PV of Cash Flows
less debt
plus cash
Total Equity Value

Price as of 2/15/2015

$38.42

PV of Cash Flows
less debt
plus cash
Total Equity Value

$1,558.30
31
239.83
$1,767.13

Price as of 2/15/2015

$38.42

PV of Cash Flows
less debt
plus cash
Total Equity Value
Equity value / share
Price as of 2/15/2015

Terminal growth assumption: 2% all scenarios.

This is a conservative assumption in a high growth
industry.

Premium over market value

5 year ROI
Implied Value EV/EBITA ( Dec 2014)

Total outstanding shares: 31 million

(as of Dec 31, 2014)

IRR

18

16%

$57.00

IRR

Base Case Scenario

11.9%
1.89x
48.3x

Equity value / share

Premium over market value

5 year ROI
Implied Value EV/EBITA ( Dec 2014)

Without Synergies

$1,333.12
$43.00

IRR

Optimistic Scenario

31
239.83

Equity value / share

Premium over market value

5 year ROI
Implied Value EV/EBITA ( Dec 2014)

Higher Revenue Growth

$1,124.29

48%
2.5x
64.1x
23%

$904.50
31
239.83
$1113.30
$35.90
$38.42
-6.5%
1.46x
44x
11%

Calculating the Cost of Capital

Discount Rate
Sierra Wireless WACC
Risk free rate (Rf)1
Market Risk Premium (MRP)2
Sierra V/E
Sierra re-levered
Debt / Capital
Equity / Capital
Cost of Equity
Cost of Debt3
4

Tax
WACC
30 year Treasury
Assumption
3
2014 cost of LT debt

Nokia WACC
2.63%
5%
1.02
1.48
6%
94%
10.04%
4.70%
32.10%
9.63%

Risk free rate (Rf)1

Market Risk Premium (MRP)2
Nokia V/E
Nokia re-levered
Debt / Capital
Equity / Capital
Cost of Equity
Cost of Debt3
4

Tax
WACC
1

2014 actual tax rate

5%
1.09
1.61
23%
77%
10.70%
5.20%
38.80%
8.97%

30 year Treasury
Assumption
3
2014 cost of LT debt

2.63%

2014 actual tax rate

Both Sierra and Nokias WACC were calculated to construct various cash flow scenarios and conduct
valuations. The base case scenario utilized Sierras WACC to create cash flows as-is and optimistic scenario
utilized Nokias cost structure and WACC.
Companies in the wireless and internet-of-things(IoT) industry was considered as comparables to derive
WACC for both Nokia and Sierra. Both Sierra and Nokia have been very active in acquisitions. The financials
used are based on 2014 EOY figures.

19

Combined Firm Valuation Bridge

Base Case Scenario with Synergies

1.63

0.88

28.70

1.21
1.34
21.80

0.67

0.45

0.80

(in Billions)

Enterprise
Value preacquistion

Expansion
of Sierra
products to
Nokia
customers

5G utilization
for Sierra
products

Patent
Leverage for
upsell to
existing
customers

Competitor
Product swap

IoT and Cloud

revenue

Patent Royalty Marketing/Sales

elimination
synergy

Enterprise
Value post
acquisition

The valuation bridge assumes the base case scenario with synergies. Five key revenue drivers and two
synergy drivers were applied to construct. 65% of the valuation increase was enabled via revenue
upside with Cloud and Internet-of-Things solutions and ability to swap out competitor products were
key drivers (60%) of revenue increase.
The additional 35% of the valuation increase was due to strategic synergy (Sierras Wi-Fi payment
elimination 65%) and operational synergy (Marketing, sales, operations, admin function 35%)
drivers.
20

Comparables Analysis
Sierra Wireless
Other technology companies were compared for valuations based on last twelve months (LTM) EBITA trading
multiples. Sierra wireless is already trading at a rich multiple on EBITA basis due to the forecasted products
and high growth market for Internet of Things (IoT).
Sierra is trading at 44x LTM multiple compared to the 11x multiple for other high tech companies.
However, Sierra does differentiate itself from most competitors with the products and solutions and higher
growth opportunities and partnerships.

Industry and Precedent Transaction Analysis

Overall Telecom industry transaction for the last few years
Closed Date Target

Revenue
LTM

EBITDA LTM

Revenue
Multiple

EBITDA
Multiple

Buyers/Investors Trans.

Value

Major Business Focus

03/13/2014 Leap

AT&T

4,913.9

3051.4

466.6

1.3x

8.6x

wireless service

11/30/2011 PAETEC

Windstream

2,356.5

1840.2

312.9

1.2x

7.2x

Integrated Broadband communication services

02/28/2014 Telecom New Zeleand AustraliaTPG Telecom

408.7

372.6

50.0

1.1x

8.2x

Managed telecom

Companhia de
06/20/2013
Telecomunicacoes de Macau

CITIC Telecom
International Holdings

1,161.0

616.5

170.0

2.3x

8.2x

Mobile and fixed line and broadband

12/26/2012 eAccess

SoftBank

4,789.8

2646.8

605.9

1.6x

7.2x

Broadband Internet IP Communications

07/10/2013 Sprint

SoftBank

37,296.8

35438.0

5305.0

1.1x

8.9x

wireless and wireline comms

10/04/2011 Global Crossing

Level 3 Communications

2,914.5

2622.0

403.0

1.0x

6.6x

Communications solutions

10/01/2012 TowerCo Holding

SBA Communications

1,850.3

145.7

61.0

12.7x

30.2x

Communication towers

44.4x

Wireless Communication and Internet of Things

source : Capital IQ - Top 100 US M&A Deals in Telecom (2010 to 2014 YTD April)
NA

Sierra Wireless

Nokia

Year

2013
2012
2011
2010
2009

1224.4

Deal
Volume
325
347
435
469
385

Total
disclosed
value
84,096
106,675
149,351
126,405
93,560

605.8

27.6

Avg. Deal
Value
618
667
722
585
490

2.02x

Median
Avg.
Avg.
Deal revenue
EBITA
Value Multiple multiple
23
3.1x
8.1x
23
3.0x
11.2x
25
2.5x
7.2x
20
4.4x
7.4x
12
5.1x
7.0x

Source: Capital IQ (in $ millions)

Mean
Median

3.6x
3.1x

8.1x
7.4x

High
Low

5.1x
2.5x

11.2x
7x

2.02x

44.4x

Proposed Nokia purchase offer

21

Sensitivity Analysis

22

APPENDIX
Nokia: A Unique History of Reinvention
Nokia: List of Acquisitions
Sierra Wireless: Pro-forma Income Statement
Sierra Wireless: Pro-forma Net Working Capital
Sierra Wireless: Pro-forma Balance Sheet
Sources for Valuation and Financial Analysis

23

Nokia

A Unique
History of
Reinvention

1865 Pulp, paper and rubber goods manufacturer

Nokia was a pioneer in the industry and introduced
many new production methods to a country with only
one major natural resource its vast forests. As the
industry became increasingly energy-intensive, the
company even constructed its own power plants.
1922 Acquires Finnish Cable Works (as separate co)

Advertisement for Nokia Rubber Shoes, 1905

Finnish Cable Works (est. 1912) manufactured

telephone and electrical cables.
1967 Nokia Corporation Formed
A merger of its three owned companies allowed Nokia
to officially diversify into a regional conglomerate with
interests beyond Finnish borders giving Nokia a
strong presence in five industries: forestry, rubber
(shoes, tires, etc), cable, electronics and power
generation.
1979 Merger with Salora
This merger allowed for the standardization of carbased mobile telephony resulting in Nokia being a
pioneer as well as a dominant player in the mobile
device as well as network GSM technology throughout
the 80s well into the 2000s.
Since 1997, Nokia has acquired 41 companies and
divested parts of more than 30 companies with the
most notable being their 5.4 billion-euro divestiture of
their handset business to Microsoft in 2012.
Nokia continues to focus on its three established
businesses: Network Infrastructure and Services,
Mapping and Location Services, and Advanced
Technologies.

24

Advertisement for Nokia Tires, 1936

NOKIA STRATEGY
Take market share from competitors.
Become a leader in the machine to machine
(M2M) programmable world called Internet of
Things (IoT).
Capture market share in telco cloud, telecom
vendor data analytics and intelligent location
services businesses.
Nokia is committed to growing both organically
and via acquisitions to improve shareholder
value and profitable deployment of the cash
reserves.

NOKIA ACQUISITIONS

*Partial Acquisition
** Ownership Buyout

25

Pro-forma Income Statement

Sierra Wireless

Pro-forma Net Working Capital

Sierra Wireless

26

Pro-forma Balance Sheet

Sierra Wireless

27

Valuation and Financial Analysis

Sources

Yahoo finance
Google finance
Arris 10k
Marketwatch.com
Bloomberg financials
http://www.fool.ca
capital IQ
http://nokia.com
http://sierrawireless.com
http://company.nokia.com/
http://www.sierrawireless.com/
http://finance.yahoo.com/
http://www.macroaxis.com/
http://en.wikipedia.org/
http://www.fundinguniverse.com/company-histories/nokia-corporation-history/
http://www.referenceforbusiness.com/history2/35/Nokia-Corporation.html
http://trends.builtwith.com/mapping
http://www.digitaltrends.com/mobile/why-are-companies-defecting-from-google-maps/
http://www.frlicense.com/LTE%20Final%20Report.pdf
http://www.i-runway.com/images/pdf/iRunway%20%202G%20and%203G%20Mobile%20Communication.pdf
http://seekingalpha.com/article/1860691-a-comprehensive-review-of-nokias-future-5g-and-tax-benefits
http://company.nokia.com/en/news/press-releases/2014/05/05/nokia-launches-100-million-connected-car-fund-managed-by-nokia-growth-partners-ngp
http://www.businessinsider.com/75-billion-devices-will-be-connected-to-the-internet-by-2020-2013-10
http://www.forbes.com/sites/gilpress/2014/08/22/internet-of-things-by-the-numbers-market-estimates-and-forecasts/
http://news.ne2ne.com/articles/share/1032521/
http://www.sierrawireless.com/~/media/customer%20stories/customerstories_pdf/hti_cs.ashx
http://www.onalytica.com/wp-content/uploads/2015/02/old%20media/Onalytica_M2M_Top_100_Influencers_and_Brands_2014.pdf
http://en.wikipedia.org/wiki/Over-the-top_content
http://www.mobileworldlive.com/top-20-global-mobile-operator-groups-by-connections-and-revenue-q1-2013
https://www.visiongain.com/Report/976/Global-20-Leading-LTE-Infrastructure-Companies-2013-Competitive-Landscape-Analysis
https://www.visiongain.com/Report/1203/Top-20-Cloud-Computing-Companies-2014

28