Should Microsoft Acquire This Handset Maker?

This post is syndicated at The Motley Fool http://beta.fool.com/malayappan/2013/08/16/should-microsoft-acquire-this-handset-maker/43543/

Microsoft (NASDAQ: MSFT), recently introduced Windows 8, an operating system that powers desktops, phones, and tablets alike. While this software giant simultaneously introduced its own Windows 8-powered tablet, the Microsoft Surface, it chose not to unveil a similarly Microsoft-branded smartphone.  Instead, it relied on its traditional model of partnering with hardware manufacturers to introduce the new Windows Phone to the market.  Was this an oversight -- or a deliberate strategy with a future acquisition in mind?

Strong Symbiotic Connection

From a single glance at Microsoft's Windows Phone website, its strong relationship with the lone manufacturer that ships the majority of Windows phones is glaringly apparent.  According toForbes, handset maker Nokia (NYSE: NOK) shipped 80% of all phones powered by the Windows OS during the first quarter of 2013.  

Given the strong synergies that currently exist between these two companies in the Windows phone business, many investors wonder where this relationship's going. It seems to make sense for Microsoft to acquire Nokia, creating a strong smartphone business in one fell swoop.  After all, hasn't their broad strategic partnership been getting stronger over the years?

First, consider who runs Nokia: former Microsoft executive Stephen Elop.  Elop is one of Microsoft's largest shareholders, and instrumental in directing Nokia's seismic shift from their native Symbian OS to the Windows Phone platform.  Additionally, according to Forbes, Elop already tried to woo Microsoft into buying Nokia, but failed to convince them. Given that Nokia has gone "all-in" by jumping on to the Windows Phone bandwagon, an acquisition by Microsoft might turn out into  a make or break for Nokia!

The Microsoft Disadvantage

Close to a year after the launch of the heavily advertised Windows 8 OS, which Microsoft touted as "revolutionary", the market share of Google's Android and Apple's iOS is still largely intact.

Microsoft came late to the smartphone party and failed to impress, despite spending nearly $2 billion on the latest marketing effort.  While Apple offers an integrated hardware and software solution with a closely-tied-in iTunes apps ecosystem, Google has gone the open-source route, offering Android as a freely downloadable OS.  Microsoft licenses its OS also, but vendors have to fork over a licensing fee for every device. Google has its own Google Play apps store, which is further augmented by an Amazon.com app store that offers only Android apps for now. Microsoft doesn't have a similarly broad-based app ecosystem like its competitors.

Microsoft is a behemoth that is slow to change course and catch up with the latest technology trend.  We have seen the company initially fall behind the curve in more than one instance. The most glaring examples are office productivity software such as Wordperfect (for word processing) and Lotus (spreadsheets), Internet browsers such as Netscape, and search engines such as Google.  

However, Microsoft has also shown that on occasion, it can and does catch up and overtake first movers -- including Lotus, WordPerfect, and Netscape -- through aggressive marketing and worldwide distribution.  Microsoft has the potential to pose a challenge to the dominant players in the smartphone and tablet space. Its best bet would  be to follow the integrated software and hardware route, while still licensing its OS to hardware vendors.  In fact, Google is also following this strategy by acquiring Motorola Mobility while leaving the Android OS freely available.

The Microsoft  Advantage

Microsoft today is the dominant operating system software maker, with its Windows OS running on about 90% of the roughly 1.1 billion computers in the world (as of the end of 2012). That kind of reach offers a ready consumer market for new smartphones with people who are already comfortable with the Windows interface.

Nokia, on the other hand, has a huge presence in emerging markets across Asia and Africa, and sells well in Europe and Latin America as well. Both Microsoft and Nokia have widespread name recognition and trust. Together as one company, they would be a formidable combination.

Microsoft is still the preferred choice for office productivity software. Microsoft Office Mobile is well-integrated into the Windows Phone and offers a natural segue from the desktop to a handheld device. Given its penchant for aggressive marketing strategies, one would expect Microsoft to put incredible might into promoting an integrated smartphone business. 

The Final Take

If Microsoft acquires Nokia, it would most likely pay a premium over Nokia's prevailing stock price.  Investors in Nokia today could very well be rewarded down the road for their patience.