Microsoft Needs To Buy Nokia To Survive The Smartphone Battle

By Robert Fisher - January 17, 2012 | Tickers: AAPL, GOOG, MSFT, NOK | 0 Comments

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There have been on and off rumors of Microsoft acquiring Nokia's smartphone business. Although both executives have denied these rumors, some can't help but to think that it makes sense. Because Microsoft is trailing so far behind from Apple and Google, the company will need to do something to gain a share of the market; but what would happen if they really did acquire Nokia?

When two companies discuss mergers or acquisitions, it's usually because each company has something that the other wants. This could be a particular division, a healthy balance sheet, or the combining of the two companies just makes sense for profit maximization. Typically, when an ideal merger or acquisition occurs, M&A, this creates synergy. This is an achievement obtained by the two or more entities that could not normally occur independently. So, when the rumors of Microsoft (NASDAQ: MSFT) acquiring Nokia's (NYSE: NOK) smartphone division, many can understand why. Let's face it; Microsoft is trailing in yet another technology aspect that isn't software or operating systems. With Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG) leading the way with the iPhone and Android powered phones, Microsoft will easily remain behind unless something happens to propel the company, and their Windows based smartphones, forward.

According to reports, Nokia could essentially transfer the smartphone division to Microsoft in the second half of this year and would operate under a new name. This would also include manufacturing facilities and a portfolio of patents. The acquisition wouldn't be too much of a stretch as the two companies already have a broad strategic partnership with one another. Nokia currently uses the Windows Phone as its primary smartphone strategy and also helps drive the Windows Phone by lending its expertise in hardware design and language support. So, if Microsoft decided to buyout the Nokia division, it wouldn't be much of a transition with philosophies as it would be just a change in ownerships. One reason that the purchase would make sense is that Microsoft then wouldn't have to spend the time and money to build new facilities from the ground up nor come up with designs for new hardware to develop for its phones. By making the acquisition, they would get both in a single shot. The cost in the short term might be more expensive, similar to how many believe Microsoft overpaid for Skype; however, they will then have an already developed product along with a place to manufacture it much sooner. This would ideally lead to a quicker turnaround in regard to profits. This would be a welcomed change to Microsoft in their smartphone division after the embarrassing performance of the KIN, which caused Microsoft to lose roughly $250 million without including development costs. By obtaining the portfolio of patents that Nokia currently owns, along with facilities to manufacture them, Microsoft could be taking a step in the right direction.

Another primary reason that a company will acquire another is to gain access in a market they are not currently in or to gain a stronger foothold in that market. With the current deal between Microsoft and Nokia, Microsoft benefits from Nokia's extensive operating billing agreements. This makes it easier for consumers to purchase the Nokia Windows based phones in countries where there is low credit-card use. By purchasing Nokia, Microsoft would still have this access but not have to share the profits with Nokia after the acquisition is made. Also with the purchase, Microsoft would gain software that Nokia currently owns, such as its navigation software, which Microsoft would use for the new smartphone. This kind of purchase would then eliminate the need for Microsoft to have an agreement with another company to use its software or force Microsoft to develop its own navigation software. Additionally, this merger would potentially give Microsoft a mobile platform to build for the future. This would not only be for smartphones, but could eventually expand to tablets as well if the company decided to try and compete with Apple and Google in that market as well. Ultimately, the merger would give Microsoft the ability to control manufacturing as well as distribution and offer additional global relationships that it currently does not have access to.

At the moment, however, official merger news has not yet come to bear. Both companies have denied the reports of any type of merger between the two companies, but of course, that would be standard practice under a non-disclosure agreement. If there is a merger, it seems as if it will primarily benefit Microsoft and Nokia will just get cash in return. Microsoft alone represents a good buy. If done, the merger will cost Microsoft in the short term, but could ultimately pay huge dividends in the long term. Currently Microsoft's market share in the smartphone business is only about 5% where the Android powered phones lead the market at 47% and Apple right behind it at 43%. Ultimately, if Microsoft is going to gain any ground on either of these giants, it will need to do something like this merger to put them in a better position. Otherwise, the venture into the smartphone industry may be short lived for the company.

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