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Is Time Ripe For Microsoft – Nokia Merger?

 May 07, 2012 03:31 PM

(By R. Chandrasekaran) With Finnish-based mobile device maker Nokia's (NYSE: NOK) debt rating downgraded to junk status from two rating agencies, the company is reportedly turning towards software service provider Microsoft (Nasdaq: MSFT) for financial aid. This raises a question whether Microsoft will be interested in acquiring Nokia or merger, if not now, but at a later date.

The mobile device maker's plan to revive sales of Nokia Lumia failed to take hold. As a result, its CEO Stephen Elop, a former Microsoft executive, may approach Microsoft since Lumia is based on software provided by Microsoft. What is important is that whether the software service provider will take this an opportune time to enter the company and look at the possibility of cell phone market entry.

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The viewpoint is not without any basis if one takes a look into the actions of rivals such as Apple (Nasdaq: AAPL) or Google (Nasdaq: GOOG). Both have a strong presence in the smartphone market and their own operating system for the devices. Interestingly, Google also acquired Motorola Mobility for $12.5 billion.

While Apple's iOS is used for its own products, Google's android operating system is being used by Google and others such as Amazon's Kindle Fire, Samsung and Lenova. Microsoft has a windows phone operating system but does not have a smartphone like Apple's iPhone.

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With Nokia struggling to reinvent itself, Microsoft could bring in money to reinvent Nokia. Whether the software service provider will take such a call remains a question given the rough weather that Research-In-Motion (Nasdaq: RIMM) is currently encountering.

Meanwhile, analysts do not believe that Microsoft will bid for Nokia despite its strong association with Microsoft, which is sitting on cash of more than $50 billion. Nokia's market capitalization was $11.7 billion as at the closing price of Friday.

The software company has been paying $1 billion to Nokia as part of its deal to use its software for Lumia smartphones. This does not necessarily mean the company could bid for the mobile device maker. However, the important aspect is that if Nokia puts itself on the block, then the patents that both companies have struck might also go to the buyer. No one could rule out the possibility of such patents going to rival Google, which Microsoft will want to avoid. Therefore, it is the patents that will remain in the minds of Microsoft whether to bid for it.

There is also an opinion suggesting that Microsoft would keep away from bidding for Nokia since hardware business is not its core area. Also, entering hardware business would mean that it might have to fight with companies who use its software.

One thing seems to be clear. Microsoft will be interested in helping Nokia tide over its financial crisis by giving an inter-corporate loan or at best a small equity stake to ensure that its software patents does not land with rivals. This will suit Microsoft for the time being and leave the question of bidding it at a later date. However,  the current move could well be the ground work for either merger or acquisition.



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