Microsoft Has Nokia's Hardware but Who Cares?

TheStreet.com

NEW YORK (TheStreet) -- Suspicions were raised in July when Nokia announced a $2.22 billion (1.7 billion euro) offer to acquire the remaining portion it had not already owned of its joint venture with Siemens called Nokia Siemens Network (NSN).

Although I felt it was a great deal for Nokia, the timing raised many eyebrows. Given the fact that Nokia was then in cost-cutting mode, I felt this was an expensive deal.

Complicating matters, Nokia, which mortgaged its future with Microsoft's Windows platform, wasn't gaining the sort of traction necessary against Apple's iOS and Google's dominant Android operating system -- at least not enough to produce the sort of cash flow needed to fund such an expensive acquisition.

On Monday, however, the pieces fell into place.

What probably shouldn't have come as a surprise certainly stunned investors after Microsoft announced that it was acquiring Nokia's mobile phone business, along with Nokia's strong patent estate, for 5.44 billion euros ($.7.2 billion). Raise your hand if you did not see this coming.

Strapped for cash, Nokia had no choice but to sell. We've been talking about it for months. But what are the near-term and long-term implications?

While this deal does offer Microsoft some assurances Nokia won't sell to the highest bidder -- Huawei and Lenovo were reportedly interested -- I don't believe this necessarily changes anything for Microsoft. This smells like Google/Motorola all over again.

Seeing as how Google has struggled to find synergies in the Motorola acquisition after two years, I question Microsoft's ability to extract value from Nokia, especially now on the heels of CEO Steve Ballmer's planned retirement. As I've pointed out, both Nokia and Microsoft saw eroding market share at the hands of Apple and Samsung and felt they had to do something. Nokia has essentially bailed on the market. Microsoft, on the other hand, is digging in its heels.

This could be the first sign the company is finally ready to embrace the non-PC world. It can also be the first clue as to who is more suited to replace Ballmer. I believe Stephen Elop now makes just as much sense as any name thrown out there. But there's no doubt Microsoft has finally caught on to the advantages of having a unified system, the same "ecosystem" that you hear so much about with Apple products -- and to a lesser extent, those on the Android platform as well.

Microsoft began this trek last year when it announced the Surface tablet, which the company thought would narrow the gap between itself and Apple.

Instead, with Windows 8 having become a relative flop, the gap has only widened. There's no question the failure of both Surface and Windows 8 is the reason why Ballmer is leaving. Disagree if you wish. But I don't believe the next CEO wants to take the helm being behind two 8-balls (Windows and Surface) or Google and Apple -- take your pick.

By buying Nokia, Microsoft believes it can capture 15% to 20% of the smarphone market by 2018. Given that Microsoft currently owns only 3% share, this is a pretty aggressive bet, if you ask me. Also, it assumes that Apple and Google are just going to sit on their hands and let that happen.

Investors, meanwhile, aren't wasting any time casting their opinions. Given that shares of Microsoft have been down by as much as 5% this morning, the market's not buying it -- the same way that the market never bought into Surface or Windows 8.

Microsoft needs to develop a better track record of execution before anyone will care.

Right now, with Nokia coming on board, all Microsoft has done is buy itself a little bit more time as it seeks Ballmer's replacement. But as I've said on more than one occasion, Microsoft could have accomplished the same thing for a lot less by buying BlackBerry .

At the time of publication, the author was long AAPL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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