Why Microsoft Won’t Buy Nokia
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Nokia (NYSE: NOK) closed under $2.50 a share on Friday amid rumors that Microsoft (NASDAQ: MSFT) may step in as a buyer. While this could happen, the possibility of this particular scenario playing out is remote for one simple reason: it’s not in Microsoft’s best interest.
Three reasons seem to favor this acquisition. First, Nokia is Microsoft’s primary original equipment and design manufacturer for Windows phone, which could help smooth the integration of both companies. Second, Nokia holds over ten thousand patents Microsoft would not want to see fall into their competitor’s hands. Third, acquiring Nokia puts Microsoft in the hardware business, making them more competitive with Apple (NASDAQ: AAPL).
Some analysts, however, disagree. "Microsoft would be foolish to buy Nokia, plain and simple," said Jack Gold, an analyst at J. Gold Associates. "This idea of Microsoft buying Nokia comes up each time Nokia has a bad quarter, and some financial analysts think it's a good idea -- no doubt to pump up the Nokia stock a bit. There really is no advantage to Microsoft owning a device hardware company."
While this acquisition idea might be interesting, don’t expect to see it happen anytime soon. As of March, 2012, Nokia had over $12.4 billion in cash, enough to keep the company afloat at least until 2013. Nokia doesn’t have to be in a hurry to find a buyer, especially if their management team can start turning the company around.
Nor are Nokia’s 10,000 plus patents enough to force Microsoft’s hand. At present, Nokia hasn’t made a move to sell their patents and, with $12.4 billion sitting around, they don’t have to. If Nokia continues their downward slide, it makes more sense for the two companies to negotiate a purchase price between them. Should Nokia try to sell them to a third party without Microsoft’s consent, the resulting lawsuit, courtesy of Microsoft, would tie Nokia up in court for years.
Apple is one of the very few companies to successfully combine software and hardware production under one roof. Microsoft’s acquisition of Nokia would not make it another Apple and Bill Gates is smart enough to know it. Microsoft learned a hard lesson in 2010 when they paid $500 million dollars to acquire mobile company Danger and released the Kin phone on April 12th. Only 79 days later, the project was obviously a flop and Microsoft, not one to throw good money after bad, pulled the plug.
Xbox aside, Microsoft is in the software business. Any software errors or updates can be written and made available for download relatively inexpensively. Not so with hardware. Companies pour millions of dollars into hardware designs they hope consumers will buy and a miscalculation can cripple and sometimes put a company out of business. Remember TechCrunch’s Crunchpad? If you don’t, you’re not alone. Hardware is a hit-or-miss deal and Microsoft’s not looking to repeat the Kin phone fiasco.
Microsoft is successful because they do what works for them: write software. Bill Gates knows this better than anyone else, which is why Microsoft won’t buy Nokia.
kprogers has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.