(NOK) Nokia to Divest Messaging Unit

Nokia Corporation(NOK), the world’s largest mobile phone maker, plans to divest its instant messaging service division to British-based firm Synchronica for $25 million.

The acquisition will allow Synchronica to enter the U.S. market and gain access to Nokia’s 6 million end users. Furthermore, it will also enable the company to counter the threat from other premium messaging services such as Research In Motion’s (RIMM) BlackBerry Messenger and the new iMessenger from Apple Inc. (AAPL).

Earlier, in 2008, Nokia bought this premium messaging unit from Canadian-based company OZ Communications. The application used by Nokia in their messaging service includes features like MSN Hotmail, Yahoo Mail/Messenger, and Facebook. All these applications are bundled together into their handsets.

With the divestiture of its messaging unit, Nokia will shift 250 staffs to Synchronica. Earlier, Nokia had shifted 2800 employees to Accenture plc (ACC). In March this year, Nokia also sold its Qt commercial licensing and services business to Digia. All these indicate that the company wants to particularly focus in the development of its upcoming Windows Phone 7 based smartphones.

Nokia faces stiff competition from Google Inc’s (GOOG) Android-based smartphones and Apple’siPhones. Moreover, with the growing popularity of tablets, which Nokia lacks in its product portfolio, will hurt profitability going forward. Further, we expect Nokia to gradually lose market share since we do not find any product in Nokia’s existing portfolio, which is unique in the market.

However, we believe that the recent lawsuit settlement with Apple coupled with Windows Phone 7 based smartphones launch and low-end product roll outs will improve Nokia’s outlook going forward.

We, thus, maintain our long-term Neutral recommendation for Nokia. Currently, Nokia has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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