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Lennox Yieke
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Yieke is an investment enthusiast with interests in undervalued plays with long-term potential. He is also an avid follower of tech stocks, auto stocks and the occasional energy stocks. In addition, he is a budding entrepreneur from Kenya, Africa. "Watch this space," he says. You can... More
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  • Ignore The Bears, Microsoft's Fortunes Just Changed Incredibly

    With details of Microsoft's (NASDAQ:MSFT) $7.2 billion purchase of Nokia's (NYSE:NOK) phone business still lingering, a lot of bears have come out to make stabs at Microsoft. Different negative views are streaming in, with some bears arguing that the challenges that Google faced with the Motorola deal will, if anything, be less than half of what Microsoft will go through with Nokia. But against the backdrop of the ruckus, the prospect of great success shines brightly for those who take the time to see it.

    The current heavy inflow of reports and analysis on the deal greatly broadens investors' perspectives, and that's a good thing. However, a broad perspective without depth is like a one-meter-deep swimming pool the size of the Atlantic ocean. To deepen your perspective and obtain a far greater understanding, you need to dig back into shelved reports and archived articles; blow off the dust, join the dots and establish key patterns.

    Microsoft was long prepared for a deal

    Perhaps the most ludicrous headline I have seen so far is: 'Microsoft not prepared for the problematic child'. The moment Nokia signed off to Microsoft's Windows Phone, was the moment Microsoft started preparing for a deal.

    Let's date back to 2012 and move forward progressively.

    If you take a look at Nokia's 20-F report for 2012, you will note that it categorically pointed out that the Microsoft Windows Phone deal was lopsided. Nokia inked the Windows Phone deal knowing that it could be unfavorable. Worse still, Microsoft did little, if anything to support marketing of Windows powered Lumia handsets. This is ironical considering that Microsoft had the financial muscle to do so. At the time, Nokia was not only deep in the red, but also desperately looking for ways to stay afloat. Visible testaments to this include the $223.3 million sale and subsequent leaseback of its Finnish headquarters toward the end of 2012, the layoffs, and the constant cost cutbacks.

    Back in July, rumors started emerging that a deal was in the horizon. As a side note I remember writing an article saying that the deal would happen. As usual, naysayers thwarted the idea. But now, it has come to pass. Microsoft buying Nokia's mobile business was in actuality a matter of when and not if. And more importantly, Microsoft had more than enough time to prepare ahead.

    Unique Windows Phone experience and fresh organizational structure perfect mix

    Research by Gartner affirms that smartphone sales exceeded feature phone sales for the first time in the second quarter of 2013. Smartphones sales clocked up a 46.5% year-on-year growth rate, with the Android and iOS ecosystems fuelling the growth. Android now controls 79% and Apple (NASDAQ:AAPL) 14% of the entire smartphone market. Despite coming in at a distant third, Microsoft may disrupt the market considering that people are now looking for different experiences. Numerous social media jokes are coming up that all smartphones today are essentially similar. This could be a subtle sign that consumers want something new.

    From a tech standpoint, Microsoft's Windows Phone is likely to grasp the attention of developers and enterprise clients going forward because of its tighter security features when stacked against Android. Better still, Microsoft, unlike Nokia before, has the financial muscle to attract this said attention.

    Windows Phone's potential, paired with a renewed organizational structure, will revive Microsoft. For some time, the main problem with Microsoft has been execution. It was either too early to the party or too late. This was been attributable to bureaucracy, the organizational structure and the leadership style. For instance, Windows 8, despite being a great work of innovation, failed because it made users learn how to use a touch screen interface on devices without a touch screen.

    Now however, bureaucracy is going away with Ballmer. While rooting out Ballmer was as hard as divorcing a petulant child from his beloved toy, it had to happen. Microsoft's major restructuring, announced in July, will now begin taking form. Microsoft will become like Apple. And this could pay off immensely. Apple is organized by function rather than form. You will find a software engineering and hardware engineering department, rather than an iPad department. This structure removes bottlenecks, enhances synergies and reduces conflicts in the workplace. If Microsoft can effectively push through with a similar structure, as it plans to, it will be able to maximize on efficiency and improve its execution in leaps and bounds. Now more than ever, Ballmer's devices and services agenda will come to greater focus.


    One thing that I agree with the bears is that the Microsoft-Nokia deal will have a negative impact on near-term margins. Hardware margins are typically much lower than software margins. Microsoft actually believes that the purchase will hurt fiscal 14 EPS by $0.08. However, for investors, this will be the best entry point. Buy on the pullback. Once Microsoft successfully uses Nokia to create a new paradigm in the smartphone industry, and efficiencies brought about by the restructures come to light, everyone will want to buy Microsoft. By then, investors who bought on the pullback will be riding on the waves of a record rally.

    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.

    Tags: AAPL, NOK, MSFT, long-ideas
    Sep 04 2:59 PM | Link | Comment!
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