Microsoft Forced Into Nokia Bidding War

Jun.15.12 | About: Nokia Corporation (NOK)

With another 10,000 layoffs added to a previously-announced 40,000, with the stock tanking toward penny stock land, and with warnings of more losses to come, Nokia (NYSE:NOK) seems to be in a race with Research in Motion (RIMM) for the bankruptcy courts.

Microsoft (NASDAQ:MSFT) can't afford to let this happen. Nokia is its primary OEM for Windows Phone, and a bankruptcy would be terribly embarrassing. More important, Nokia has 10,000 patents, enough to keep the whole industry in court for years to come.

Microsoft may have been hoping to get Nokia on the cheap, catching it as it fell, but that's going to be difficult, given the perceived value of the patents and the fact it has $12.4 billion of cash still on its books as of March 1.

The situation has reached the point where a private equity firm could easily scoop up the company for the cash, sell the patents off to a troll, and walk away with profits of literally billions, leaving Microsoft with no partner and an awful stain on its reputation over what it does to partners.

Microsoft is still in a position where it can buy the company for cash, hold the patents or share them, move manufacturing to the same offshore partners being used for its Xbox and its rumored tablet, and give Stephen Elop the golden parachute he has been waiting for.

But there is going to be an auction, formal or informal, starting now. It's an auction Microsoft cannot afford to lose. So the price may be much more dear than the company may have once thought.

Microsoft has been hovering around $30 for an entire decade now, moving as high as $37 in 2007, before the Great Recession, hitting a low of $18 in its immediate aftermath. Its trading range has grown increasingly narrow, propped up by a dividend now yielding 2.67%, and hurt by every new rumor coming out of Finland.

Ending that bleeding, decisively, could be the start of a decisive move upward in MSFT's current valuation of $251 billion, now less than half that of Apple (NASDAQ:AAPL). But the price has to be right. And the right price at this point might make Nokia worth a look from those of a speculative nature.

Disclosure: I am long AAPL, MSFT.