5 Positives About Microsoft's Acquisition Of Nokia

Sep. 4.13 | About: Microsoft Corporation (MSFT)

Microsoft's (NASDAQ:MSFT) acquisition of Nokia's (NYSE:NOK) mobile phone business dominated the headlines and conversations in the market on Tuesday. Much has been made on why it was an ill-conceived pickup. Complaints range from Microsoft's dismal history outside of software, that the acquisition will be a huge distraction for the giant from Redmond and about Nokia's minor share of the smartphone market.

As a holder of Microsoft, when I first heard the news of this, I was not thrilled. It certainly was not on my list of the two critical things I thought the company needed to do to move the stock price. However, upon reflection I can see some possible positives for this move. Since it is much easier to be a critic, and much criticism has already been heaped on combination of Microsoft & Nokia; I will play Devil's Advocate and take the other side of the argument.

5 possible positives from the transaction:

CEO Succession:

The company was bound to be distracted over the next 6 to 9 months as numerous candidates were floated and vetted to be the new leader of Microsoft. With this acquisition, it clearly appears that the CEO of Nokia, Stephen Elop; has the inside track to the corner office in Redmond. Mr. Elop was already considered to be a strong contender for the top job as he had previously run the Microsoft Office division until leaving for Nokia in 2010. This should strongly incent him to ensure the integration of the acquisition goes well and could also mean that Mr. Ballmer could be gone sooner than originally expected.

Smartphone Integration:

With the acquisition of Nokia, Microsoft now owns both the software and the hardware side of new smartphone products. This is a recipe that Apple (NASDAQ:AAPL) has used so well to develop & maintain the iconic iPhone franchise. I am not expecting the same results from this combination, but it should mean faster launches, more innovation and better integration between design and software in new products.

It was cheap:

At just over $7B, the acquisition is relatively cheap especially given most of the funding will come from Microsoft's cash hoard overseas which is somewhat "trapped" by not wanting to repatriate it and pay additional U.S. taxes. Yes, Nokia's mobile phone business is posting losses currently but it has tens of billions in annual sales and distribution throughout the world. Until a few years ago, Nokia was also the leader in the mobile space.

Additional benefits:

Besides the straight mobile handset business, Microsoft also required some 8,500 design patents and paid for licensing of tens of thousands of other patents. Given how the industry is increasing litigious the mobile space has become, this patent hoard has value. In addition the Nokia brand has to have some intangible value.

It could work:

Investors knocked some $13B off Microsoft's market capitalization Tuesday for its ~$7B acquisition of Nokia. I would say the downside is fully priced into the stock after the sell-off. But what if the acquisition succeeds? Microsoft has become a small but solid #3 player in the smartphone space with just under 4% market share.

Nokia's Lumia smartphone line has received generally favorable reviews but has had tepid sales so far. Microsoft certainly has the funding capacity to continue to build an ecosystem and take additional losses while increasing market share. In addition, telecom carriers certainly have an incentive to give some business to the Microsoft/Nokia combination as they desperately want to avoid a complete duopoly of Apple's iPhones and Google's (NASDAQ:GOOG) Android.

The bottom line is that with yesterday's sell-off, investors have already let their feelings/concerns be known. My own perspective is that the combination will probably muddle along but the downside already seems priced in. However, if Microsoft & Nokia somehow makes this integration work and builds market share; the upside could be substantial. Seems like a low risk, high reward bet.

Disclosure: I am long MSFT. 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.