After yesterday's sizable drop in Nokia (NOK), the market was filled with rumors that Microsoft (MSFT) might be forced to acquire Nokia, given its dire situation. However, I believe this was never the case and is something that will never happen.
Proponents of Nokia's acquisition claim that by integrating Nokia, Microsoft will achieve what Google (GOOG) did by acquiring Motorola: having both hardware and software in the mobile market. Ideally, both Google and Microsoft can then copy Apple's (AAPL) business model and both become do-it-all giants.
This wishful thinking, in fact, goes against everything Google and Microsoft stand for: openness and monopoly.
It may sound absurd, saying that Microsoft is an "open" company. But it is far more open that Apple used to be. Most readers who have experienced the history of the PC era have a great memory of how Microsoft cornered Apple, putting it on life support prior to Steve Jobs' return. The trick? Microsoft was open to both hardware and software (application) companies. Apple, at the same, was pretty much on its own with Macintosh computers. Part of the iPhone's success today is actually to encourage the creation of apps from a third party. Apple learned its lesson from Microsoft.
The case with Google is obvious. It has been a big proponent of openness on the Internet -- perhaps not unselfishly, as an open web makes it easier for Google's robots to extract content. Android itself is an open-source OS.
By integrating with a hardware company, Microsoft and Google would both alienate their respective hardware manufacturers: Samsung, HTC, LG, Huawei, ZTE, etc. It is a no-go. I very much question how long Google will keep Motorola's cell phone business.
The power of software largely lies in its stickiness. Once adopted by a large group of people, the software achieves near monopolistic market power. That is the case with both Windows and Google's search engine. This also means that Microsoft and Google can both update their core businesses slowly without running into much trouble.
The hardware business, however, is quite different. The market is usually a fierce dogfight. New devices have to be introduced every year in order to stay ahead of competitors. One misstep and the consequence could be disastrous (as we have just seen in the case of HTC).
Managing hardware business is very different from managing software business. Neither Microsoft nor Google has the stomach to digest Nokia or Motorola. One might argue that Microsoft owns a hardware business in Xbox. Well, the core of Xbox business is much more software than hardware. As long as new games keep getting introduced, the console itself doesn't get updated very often.
Nokia acquisition believers might argue that Microsoft would be forced to buy Nokia because if someone else does, Microsoft is in serious trouble. First of all, no company except Google or Apple could potentially benefit from screwing up a mobile hardware provider for Windows. But neither would dare do it, as the company would almost surely get sued by the Department of Justice. There are many ways Microsoft can keep Nokia alive long enough, but acquiring is really a no-go. Plus, Nokia has enough cash to survive through 2013. If it couldn't turn things around by then, what is the point of keeping it alive?
Instead of Nokia, Microsoft (or even Google) should strengthen their core business by acquiring Yahoo (YHOO), which has become really cheap now. With Scott Thompson gone Yahoo has finally resolved its dispute with Alibaba (ALBIY.PK), and this transaction would create $7.1 billion for Yahoo. Yahoo also owns a big piece of Yahoo Japan, another cash hoarder. Overall, Yahoo is very cheaply valued.
Beside Windows, Microsoft has clearly put a lot of emphasis on its search engine Bing, which lags far behind with a 15% market share (compared to Google's 65%). By adding Yahoo's business to Bing, Microsoft could almost double its share instantly. Yahoo's massive web traffic (it's the fourth largest website globally by traffic, according Alexa) is also a nice addition to Microsoft's more and more web-driven business.
Conceivably, the facts about Yahoo also make it very attractive to another Internet giant, Google. However, given Google's market share in the search engine arena, it could raise antitrust concerns. Perhaps for this reason Microsoft doesn't seem to be eager to rush to bid on Yahoo now.
Finally, here's a somewhat wild idea: Could Baidu (BIDU) acquire Yahoo in a cash-and-share swap deal? This deal could be good for Baidu for multiple reasons. First, it puts Baidu's inflated share price to good use. Second, by acquiring Yahoo, Baidu would instantly have a market presence in the United States. Third, by owning (instead of selling) part of Yahoo Japan, Baidu can improve its chances to become a significant search engine in Japan after an earlier ill-fated attempt.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YHOO over the next 72 hours.