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On February 11, 2011, Microsoft (MSFT) and Nokia (NOK) announced broad plans for a strategic partnership. In effect, terms of the agreement intimated that Microsoft would ante up Windows software and marketing cash in exchange for exclusive access to Nokia hardware. On the surface, pun intended, this strategic partnership was brought forth in order to build out an integrated ecosystem rivaling that of Apple's (AAPL) iOS and Google's (GOOG) Android. After literally reading between the lines, however, the original strategic partnership agreement does seem to be one of the first happenings in a chain of coincidental events to ultimately deliver Nokia into the hands of Microsoft as an acquirer.

Stephen Elop, Nokia CEO, is a former Microsoft man. Last month, in June 2013, The Wall Street Journal and "people familiar with the matter" reported that Microsoft was in "advanced talks" to purchase Nokia's handset business, but the pending deal collapsed over price. The breakdown in these discussions may serve as further evidence that the Microsoft-Nokia alliance has been an abject failure. Going forward, Microsoft may consider quietly walking away from Nokia and abandoning the smart phone business altogether. As always, Microsoft shareholders are best served when Redmond executives focus on their core competency of licensing software to personal computer manufacturers.

I am a Mac. I am a PC.

Apple's timeless Get a Mac campaign airing between 2006 and 2009 still defines today's consumer electronics space. Apple personifies itself as a chic, yet eager to please hipster. Alternatively, Microsoft is a corporate drone and near relic that demands help simply to stay out of his own way. Juxtaposed against these advertisements, the blockbuster iPod, iPhone, and iPad releases burnished a halo effect at Apple at the same time that Nokia and Microsoft were effectively mocked as has-been operatives. As recently as calendar Q1 2012, Nokia was hailed as the world's largest handset maker, in terms of units sold. Today, the Nokia-Microsoft alliance is actually battling for survival against the likes of both fellow fallen star BlackBerry (BBRY) and the Google Android and Apple iOS duopoly.

On June 28, 2013, research firm comScore released its report presenting May 2013 U.S. smart phone market subscriber share. The comScore data averages information for the three-month period spanning between February 2013 and May 2013. The Google Android-Apple iOS operating system duopoly is consolidating power -- as evidenced by a 1% increase in share -- to control a staggering 92% of the total U.S. smart phone market. On the handset side of the ledger, Apple and Samsung (OTC:SSNLF) are the leading original equipment makers, with respective 39% and 23% shares of this market. Certainly, Microsoft's eleventh-hour turn to abandon Nokia at the negotiating table is largely due in part to failure of the Windows phone to gain and maintain traction within the smart phone market.

Windows Phone Fail

All challengers to the Apple iOS-Google Android duopoly throne now follow a maddeningly cyclical pattern. Prior to release, each new BlackBerry or Nokia handset is dubbed the latest in a line of "iPhone-Galaxy killers," that will revolutionize the smart phone market. Share prices of both stocks will rise sharply prior to and through the phone launch. The following quarterly report, however, will reflect disappointing sales and an earnings shortfall. Irrational speculators will then dump stock upon digesting what has now become inevitable news. On April 18, 2013, Nokia reported a $196 million loss for its fiscal Q1 2013. The Lumia was then an obvious disappointment and traders immediately sold off shares to $3.17 -- and a 13% loss on the trading session.

For the first fiscal quarterly period ended March 30, 2013, Nokia reported record sales of 5.6 million Lumia Windows phone units for the quarter. This performance is more than double the year-over-year quarterly period in 2012, when Nokia sold only 2 million Lumia phones. According to Tom Warren and The Verge, Nokia has shipped roughly 20 million Lumia smart phones since the November 2011 debut of this product. During its latest second quarterly period ended March 30, 2013, Apple sold 37.4 million iPhone units.

By every metric, the Nokia-Microsoft partnership is a failure -- because the Windows platform has yet to make any significant dent within the smart phone marketplace. Going forward, Microsoft should take its proverbial chips off the table. For Nokia shareholders, the threat of Microsoft financial backing withdrawal would throw this company into bankruptcy. Microsoft is now negotiating from a position of strength -- because Nokia brass refuses to adopt the Android platform, while Redmond executives openly flirt with and engage the likes of Samsung and Huawei Technologies as rival original equipment manufacturers. While leading this mating dance, Microsoft deal makers may even feint to quit while they are ahead, only to return to scoop up Nokia on the cheap as vulture investors.

The Bottom Line

Again, Nokia posted a disappointing $196 million loss during its latest fiscal quarter. Be advised that Microsoft has continued to pay $250 million to Nokia each quarter in "platform support payments." According to a recent regulatory filing, Nokia now owes a net $650 million in royalty payments to Microsoft. At the moment, Nokia is effectively a parasite suckling at the underbelly of Microsoft. At any moment, Microsoft could walk away from this deal, allow the parasite to die, and reclaim assets later on as the first creditor in line. Business is business. Nokia shareholders must be cognizant of the reality of this situation -- and should consider selling out immediately to avoid steep losses.

Nokia closed out its Q1 2013 with $25 billion in assets above $20 billion in liabilities on the balance sheet. On a per share basis, $5 billion in net worth calculates out to be a mere $1.35, when divided above 3.7 billion shares outstanding. At $4.15, Nokia stock remains overvalued, especially after considering that this company posts no earnings despite the fact that Microsoft is effectively paying it to carry product. The balance sheet does include $6.8 billion in goodwill, other intangible assets, and property, plant and equipment. In theory, these assets must be written down towards zero, if they cannot be leveraged to turn real profits. Right now, Nokia is running on fumes, as it has been forced to lay off workers, consolidate real estate, and sell off securities to harvest cash flow and meet debt obligations.

The Nokia Lumia 1020 launch event is set to embody yet another maddening cycle of frantic technology blog posts, unwarranted hype, awkward retailing, and sales performance disappointment come earnings season. Microsoft, with its $300 billion in market capitalization now operates with nothing to lose and can play for keeps. At any moment, Microsoft could walk away, allow Nokia to crash and burn, and re-enter the picture as a savior of proverbial scrap. As par for the course, Microsoft shareholders will still own a blue chip stock with minimal growth prospects that generates massive cash flow for robust dividend payments. Ironically, Microsoft could own Nokia for a song -- by doing nothing.

At the moment, no other technology player will step up and call Microsoft's bluff for Nokia.

Source: Memo To Microsoft: Walk Away From Nokia