What if Microsoft was a forced buyer?

Desperate times. Why else would a company that’s watching its core market evaporate in front of its eyes (so far in 2013, PC sales are down more than 10% vs 2012) buy a handset maker with 3.3% market share in smartphones?

Tuesday’s complex deal sees Nokia’s device/handset business become (essentially) a Microsoft division (inside its new “devices” unit).

Do not underestimate how difficult it’s going to be to integrate a company of Nokia’s scale…. For a start, Microsoft has 97 000 employees. Nokia expects 32 000 of its 90 000 worldwide staff to transfer to Microsoft. That means Microsoft is going to get bigger by one third!

Microsoft’s $8bn-plus acquisition of Skype in 2011 is telling (at the time, Skype had far fewer than 1 000 staff).

It took Microsoft nearly 18 months to integrate its existing Lync (VoIP/unified communications) business into the new Skype division. It speaks glowingly about how Skype is “integrated” into Windows 8, but that in itself was a rush-job given the timeline of this deal.

Integrating Skype into its cloud-based Office 365 suite of apps took exactly two years. And into its Outlook.com web-based e-mail service, even longer!

And none of this is exactly rocket science. Now its got to merge aspects of the Nokia business with its existing Surface *(tablet) unit? I’m not convinced.

Also, it took Google nearly two years to ship its first ‘flagship’ (Moto X) device following its $12.5bn acquisition of Motorola. These are the timelines we’re talking about… Any (additional) impact Microsoft can have by being in full control of Nokia will only be seen in 2015.

And the irony in all of this is that Microsoft’s already been shaping Nokia’s Lumia strategy given how dependent that is on the Windows Phone roadmap!

Financially, the Nokia deal makes sense. Microsoft is using cash already offshore which would be costly (in terms of taxes) to repatriate to the US. You could argue it’s not actually ‘spending’ anything at all on this deal.

Perhaps it makes sense tactically too (even if it’s been spun as a ‘strategic’ transaction). Then again, it’s probably three years too late. Why did they walk halfway down the aisle in 2011?

And what about strategically? Microsoft will tell you this makes perfect sense and that the rationale is compelling. There’s a 30-page slide deck, memo to staff and comprehensive set of announcements to convince you. But what if (outgoing) CEO Steve Ballmer’s One Microsoft strategy is wrong?

As if there was any doubt before this, Microsoft’s Windows Phone strategy is in disarray. Why would any other handset maker rush to license WP (and pay $10 per device in royalties to do so)? Samsung and HTC each produced half-baked devices running WP. For the former, it follows its strategy of addressing every conceivable market (witness its myriad of device/screen sizes), while the latter was trying anything and everything (witness its collapsing Android device sales and its latest efforts at building a China-focused operating system).

With the original Nokia ‘partnership’, the prospect of a burgeoning WP ecosystem was lukewarm at best. The message Microsoft was sending to others was clear (even if its official line was that it wouldn’t favour Nokia). Tuesday’s deal hammers the nail in the licensing coffin.

What if Microsoft were forced buyers?

Buried in the raft of announcements was a note that Microsoft had immediately made available €1.5bn of financing to Nokia in the form of convertible bonds. Crucially, this is not contingent on the deal closing at all and Nokia will redeem any outstanding bonds once it closes.

What if Nokia was about to hit the wall?

Microsoft simply couldn’t let that happen. Perhaps $7.2bn was a tiny price to pay on whatever upside it thinks it can wring from Nokia….

It’s highly unusual (but not impossible) for a consumer electronics business to recapture lost market share after a fall from the lead. A lot is going to depend on Microsoft’s ability to execute, and based on that track-record with a relatively simple business in Skype, I’m not exactly hopeful.

This deal leaves many more questions than answers. And nothing fundamentally changes between Monday and Tuesday. Microsoft’s core business is facing intense disruption and Nokia’s marketshare in smartphones remains a distant third.

Plus its not-quite-smartphone feature-phone ‘Asha’ series of devices are a very uncomfortable fit. Ironically this is the only consumer-facing segment in Nokia that’s profitable. “Asha” receives exactly one mention in the announcement (as a ‘brand’ its acquiring).

We’ll see in 2015.

* Hilton Tarrant contributes to ‘Broadband’, a column on Moneyweb covering the ICT sector in South Africa. He wonders if the Nokia brand will exist at all in five years’ time….

Source: Moneyweb

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