Did Microsoft Hint At Acquiring Nokia?

| About: Microsoft Corporation (MSFT)
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Microsoft Corporation (NASDAQ:MSFT) has declared war on Apple Inc. (NASDAQ:AAPL) once again. Unlike the last time when the two companies came face to face years ago, Apple will prove to be a much larger challenge to Microsoft now as it has one of the strongest balance sheets and brand images in the world. Microsoft's CEO Steve Ballmer declared that Microsoft would make sure that it does "not leave any space uncovered to Apple". Wherever Apple is Microsoft wants to be, and Microsoft will need a lot of allies in this war. One of these allies is Nokia Corporation (NYSE:NOK).

Nokia's role in this war is clear. The company is expected to build smartphones that will operate in Windows 8, sue Apple for patent infringements, and supplement Microsoft tablets with its mapping technology. While companies like Samsung, HTC and LG might end up joining the caravan of Windows 8, Microsoft will not rely on them very much in the war against Apple. Those companies are mainly Android providers and they will produce Windows 8 phones just for the sake of diversification. Nokia is the only company that will put all of its eggs in one basket, and that's what Microsoft wants from Nokia.

Here is the deal: when Steve Ballmer was asked whether Microsoft would start building smartphones, he refused to give a clear answer. He pretty much said "we will wait and see." According to Mr. Ballmer, Microsoft will focus on its tablet first and take it one thing at a time. The fact is that a company as large and sophisticated as Microsoft doesn't have to focus on "one thing at a time." The company can focus on tens of projects at the same time.

Ballmer didn't rule out the possibility of Microsoft producing its own smartphones, he simply said "not now." Why not now and why later? It looks to me like Microsoft will let Nokia give it a try first and it will take the matter in its own hands only if Nokia fails at it. Microsoft doesn't know whether Nokia's turnaround will be successful or not. At this point, even Nokia itself might not know the case. If Nokia fails, Microsoft is likely to buy Nokia and take the matter in its own hands. From the looks of it, Microsoft is very serious about its war with Apple, and it will not simply give up if one of its partners fails to deliver.

"Not the consumer cloud. Not hardware software innovation. We are not leaving any of that to Apple by itself. Not going to happen. Not on our watch." These are not words I would take like a joke coming from the CEO of one of the largest corporations in the world. I don't know if Microsoft can win this war against Apple; in fact, I don't even know if this war can have a clear winner, however, I know that Microsoft has enough resources to keep this war going for a long time. If Nokia falls apart, Microsoft will just pick up the pieces and carry on. This may be in line with Nokia's "back-up plan," which was hinted by the management without much clarification a couple weeks ago.

Earlier on, Greg Sullivan, senior marketing manager for Windows Phone, denied that Microsoft was planning to build its own smartphones. Obviously, Microsoft will not get in the game until it sees Nokia fail. Recently, Microsoft acquired Perceptive Pixel for the company's touchscreen technology. Microsoft will need more than this if it wants to move from tablet to smartphone, and Nokia can provide a more-than-sufficient patent portfolio in case Microsoft needs it. Of course, Microsoft would love to collect $600 million annually from Apple as Nokia does, and this is just one more reason for it to acquire Nokia.

If Microsoft wants to stay relevant in its war with Apple, it has to rely on more than just computers and Xbox systems. There is far more growth in the smartphone market than there is in the PC market, as more than 2 billion people are expected to buy smartphones in by the end of the decade. Also, mobile phones get replaced every couple of years as opposed to computers that last much longer, so Microsoft could sell far more licenses in the mobile phone market than in the PC market.

Microsoft expects Windows 8 to revolutionize the technological world just like Windows-95 did 17 years ago. This is why the company's CEO labeled 2012 as the most important year in the company's history since 1995. Microsoft has invested a lot of resources for the success of Windows 8 and it sees this product as a game-changer in the war against Apple. Microsoft will do whatever it takes to make this operating system successful in PCs, tablets, smartphones and any other applicable devices.

I would like to add a word of caution for Nokia investors. While I believe that Microsoft's takeover of Nokia is very likely in the event of a Nokia failure, it's hard to tell the price Microsoft would end up paying for Nokia. Many investors of Nokia have breakeven prices above $6 and those investors may end up losing money even in the event of a Microsoft takeover of Nokia. I still believe that Nokia will successfully turn itself around and return to profitability as it gets leaner and meaner, however, this may take a longer time than many of us would like it to take.

Disclosure: I am long MSFT, GOOG, AAPL, NOK.

Additional disclosure: Apple is the largest single component of my well-diversified portfolio.