The End Of An Era For Nokia, The Beginning Of An Era For Microsoft

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 |  About: Nokia Corporation (NOK), Includes: MSFT
by: George Kesarios

After returning to Athens and having abstained from writing for about a week now, I am forced to end my vacation soon to comment on Microsoft's (NASDAQ:MSFT) acquisition of Nokia's (NYSE:NOK) devices business.

According the press release by both companies (here and here), Microsoft for a total consideration of about $7 billion will buy Nokia's entire devices business and license several of Nokia's patents for a period of 10 years.

A planned deal from the start?

First of all let me say that this deal has probably been planned for a long time. Looking back, it is the only explanation I can find for the fact that Nokia did not divest of its NSN division a while ago (as everyone was expecting it to), but instead decided to buy the 50% portion it did not already own from Siemens (SI) (please consider: Nokia's Divestiture Of Nokia Siemens Networks Does Not Mean Much).

The Nokia board (or Stephen Elop personally) had probably planned this all along, given the financial predicament Nokia was in. I took a lot of heat saying Nokia might run out of money in my last article (please consider: Nokia's NSN Acquisition Might Be Its Downfall), but I think this deal vindicates me.

Buying NSN from Siemens for peanuts and then selling Nokia's devices business to Microsoft, was probably the best way for Nokia to continue as a going concern. And if you think about it, it was probably the only way out for Nokia shareholders (please consider: A Microsoft Buyout Is Nokia's Only Chance For Survival). And to be honest, it was a scenario that never crossed my mind.

The end of an era for Nokia

After this deal is completed, Nokia will basically only have the NSN division. Nokia will still control the maps division, but this business is too small to make a dent in Nokia's figures. Since this new company will be a pure-play in the networks space, and since the economic problems of Nokia are to a great degree solved (although we will have to wait for the deal to be completed to come to that conclusion), chances are that Nokia will now be compared to the likes of Juniper (NYSE:JNPR), Alcatel (ALU) and maybe even Cisco (NASDAQ:CSCO).

And yes, now that most of Nokia's balance sheet issues are solved, I think this should add value to current Nokia shareholders in the long run. On the other hand, this is now a totally different company and the Nokia brand will never be associated as a consumer brand name ever again.

The beginning of an era for Microsoft

I have always been a proponent of Microsoft having complete control over the hardware side of the devices business and I have also hinted that Microsoft should buy Nokia as a result (please consider: Should Microsoft Make A Smartphone?). So while I was a little surprised by yesterday's announcement, I can't say I was shocked.

Personally I think Microsoft will downsize Nokia's devices business by doing away with the Asha line of phones and getting rid of anything that does not have WP8 written all over it. Instead of Nokia's current low-end OS, Microsoft can make a stripped down version of WP8, so as to expand on the ecosystem. For Nokia having Asha phones were a life insurance policy, if its deal with Microsoft ever went sour in the future. Such is not the case anymore.

Microsoft does not care to be at the very low-end of the smartphone spectrum as Nokia was. I mean, Nokia is probably the only one that was competing head on with the very low-end of Chinese device makers. Microsoft's priority will be gaining traction in mature markets such as Europe and North America. As such, there will be a void in emerging markets that will probably mostly be filled by Android Markers and some by BlackBerry (NASDAQ:BBRY) also.

Microsoft in transition mode

Microsoft has been trying to find a way to enter the devices business for a long time now. Unfortunately, the franchise model that Google (NASDAQ:GOOG) developed did not work out for Microsoft. The main reason is that WP8 is not open source.

I do not expect the Nokia acquisition to add to Microsoft's earnings in the short term. Quite the contrary, Microsoft will probably spend many billions to build this business up and it will also cost a pretty penny to consolidate Nokia's operations with Microsoft. So I do see a drag on Microsoft's earnings looking forward as a result of this acquisition.

However, I think that the market will brush these worries aside, instead preferring to focus on what the devices business might mean for Microsoft in the far future. So even though Microsoft's stock is correcting today, I think this correction will be very short lived. And if you can buy Microsoft's stock below the $30 mark, I think you would be getting Microsoft at rock bottom prices with extremely limited downside potential.

Bottom line

While I think Nokia shareholders are getting the best possible deal at the moment, if former management had handled things different, Nokia shareholders could have enjoyed a lot more upside.

As for Microsoft, it is at last getting serious on devices that seem to be the future of computing. Whether the Nokia acquisition will prove to be the correct path, is only something that the future will show. Personally however, I think Microsoft is on the right track, and if Microsoft plays its cards right, this acquisition will be the reason for the stock to reach record highs in the far future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.