Microsoft (NASDAQ:MSFT) is no stranger to scorn and vilification. From overpaying for Skype, to their Ad related writeoff and most recently the Surface 'Disaster' (or so some think) - people seem to consider their moves somewhere between mediocre to defensive to befuddling to downright fatuous. The most recent news about the Nokia (NYSE:NOK) related acquisition has cost them about $25B to date ($7.2B in actual money and the rest is loss of market capitalization), and made it to the pinnacle of the dumbest moves of the week. I'm going to take the other side of this argument and make the case that the move is timely, synergistic, necessary and reasonably priced. As it turns out, Microsoft made a number of my theories easy to validate by all but admitting them. However, I've pulled out the good bits below to make the point.
Price is Right (maybe Downright Good). There's two bits to the price argument - the currency used, and the amount paid vs value received. The Microsoft presentation makes an explicit point on both counts.
On the currency, there have been various theories as to whether the 'offshoring' (aka tax dodge) was an important consideration in the purchase, with my theory being that the 'color of money' counted, and Gizmodo implying that it wasn't a factor. The slide below makes it pretty explicit that the Microsoft considered the use of offshore money to be a key factor in justifying the purchase.
On the second point and discounting the use of offshore money for a moment - did Microsoft get a good deal? Again, Microsoft thinks so and the assumptions made on the slide below (a 5% operating margin) don't seem unreasonable even in a confusing computing market where category margins are likely to get muddled up in the foreseeable future.
Strategic Fit, Reasonable Timing. It's no secret that the last great market left for Mobile is the Emerging Market space. It's also no great secret that this is a price sensitive market where you trade off margins for volume, and players like Qualcomm (NASDAQ:QCOM) have been gearing up for the fight. What one tends to forget is that Emerging Markets is a very fragmented space (lots of countries, price tiers, user categories). Nokia's understanding of the peculiarities of these markets from their feature phone days (e.g. the importance of FM Radio and Bluetooth File Transfer), is a significant competitive advantage. What's more, the fate of phones, tablets and notebooks/laptops will be more tightly interlinked even if the market segments don't completely merge, as covered below.
For the Long Haul. We are also seeing two other broad shifts - the invention of new device categories, and the value-shift in terms of profits away from the smartphone to accessories (thing Google Glass, FitBit etc). These are areas where design, sourcing and supply chain efficiency become at least as important (if not more so) than software and application skills. Nokia may be an 'also ran' in the latter (especially in the Internet world), but formidable in the former.
Oh .. And One More Thing. Microsoft just spent $7.2B of offshore money. That leaves $50B (and change) of it (out of the $69B stash) still in play. In a maturing mobile market with challenged margins, compressing valuations, and a large & brutal emerging markets battle yet to come - that's not a war chest to be sneezed at.
All in all, MSFT is a polarizing stock - I'm not going to argue that you switch sides (whether you're generally speaking a supporter or detractor of said stock). What I do argue is that contrary to popular press, your opinion should swing towards bullish and away from bearish as a consequence of this acquisition.