A Nokia-Microsoft Deal Must Happen

 | Jun 20, 2013 | 4:15 PM EDT
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I wrote on TheStreet Tuesday that I didn't believe a tie-up between Huawei and Nokia (NOK) was likely, even though that was the news of the day. Despite Huawei indicating it was open to some kind of merger, I said it wouldn't happen.

I guessed that the reason for the bump in the stock was investors suspected that these rumors indicated renewed talk of a Nokia acquisition by Microsoft (MSFT). Wednesday, after the market closed on a lousy reaction to the Fed's assessment of the economy, there was a report that Microsoft and Nokia had explored a tie-up earlier this year but Nokia had walked away.

I believe the two should get back to the negotiating table and patch things up quickly. They both will benefit from joining forces.

Why is it in Nokia's best interest to join Microsoft?

  • What other end-game is there? Nokia can't really sell to another buyer like Huawei without Microsoft stepping in.
  • Nokia has gone all in on Windows Phone, so it can't really diversity out of Windows Phone.
  • As part of Microsoft, Nokia would have more resources to throw at phone development, the developer community and partners.
  • Nokia has shown modest growth lately but that was while BlackBerry (BBRY) had three-year-old phones on the market. It's hard to argue that Nokia has been growing. Yes, it's now third worldwide, but that's only because BlackBerry hasn't had an up-to-date product; now it does. Nokia needs to do something to gain momentum in the space; Microsoft would certainly give Nokia more money to throw at that problem.

Why is it in Microsoft's best interest to buy Nokia?

  • Microsoft could use its considerable foreign cash reserves for the deal. Cash is cash, but Microsoft can't use this foreign cash to pay dividends or repatriate it without paying considerable taxes. Microsoft just borrows against this foreign-based cash.
  • It would likely cost considerably less than the $8.5 billion Microsoft paid for Skype. Nokia's handset business and patents are probably worth $4 billion today. Even after a substantial premium, Microsoft would pay considerably less for Nokia than Skype.
  • Doesn't Microsoft want to win in mobile? If so, doesn't it need to be more aggressive in the space and control some of its primary phones, even if it still has partners using its software?

Ultimately, this deal must happen -- unless Nokia totally fails or Microsoft decides it no longer wants to have an offering in the space. Both scenarios are unlikely.

So, why wait? Microsoft and Nokia should do this deal now.

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