Winners and Losers In Microsoft's $7 billion Nokia Deal

Microsoft (NASDAQ: MSFT  ) finally pulled the trigger on a deal that's been long in the making. The software giant will acquire the mobile division of Finnish mobile-phone maker Nokia (NYSE: NOK  ) in a $7.2 billion blockbuster deal, set to close in early 2014 if all goes as planned.

Nokia is an obvious winner here. Its share price jumped as much as 48% overnight before settling down to a still-enormous 30% afternoon gain. Nokia hasn't traded at these prices since early 2012, and the stock is still down 80% over the last five years. The company never found a way to protect its formerly dominant mobile market share in this new smartphone era, and this exit strategy is about the best the Finns could hope for.

Image source: Microsoft and Nokia, plus five minutes of GIMP editing.

The purchase is not so obviously good for Microsoft, though. The Redmond's shares plunged 6% on the news, with the first two hours of post-holiday market action doubling Microsoft's daily average trading volume. The price drop removed 15 points from the Dow Jones Industrial Average (DJINDICES: ^DJI  ) , and Microsoft is easily the weakest Dow performer on this dullTuesday.

The Nokia deal adds a serious hardware division to Microsoft, in line with outgoing CEO Steve Ballmer's vision of a "devices and services" model. The new Microsoft is starting to look a lot like the old Apple, where a single company provides the entire stack of hardware and software to build high-end smartphones.

This has worked fantastically well for Apple, which has become one of the world's largest businesses by important metrics like market cap, profit, and cash flows. But will it work similar wonders for Redmond? Aside from the Xbox gaming console, Microsoft is not known for its hardware prowess. Failures like the Zune music player, the Surface tablet, and the Kin handset don't bode well for Microsoft-branded Nokia products.

Then again, Nokia comes with some 30,000 experienced engineers, designers, and support staff. That talent, plus Microsoft's financial and marketing heft, might add up to something good. But investors seem skeptical today.

But this megadeal also shines a whole new light on the mobile market at large. Investors seem to be confused about the long-term implications, judging by the price swings Microsoft's offer unleashed.

Alcatel-Lucent (NYSE: ALU  ) has soared more than 12%. The Nokia that remains outside Microsoft's umbrella will refocus on mapping services, intellectual property dealings...and networking infrastructure. Alcatel would make sense as a buyout target for the newly cash-rich Nokia. Then again, putting these two turnaround efforts together would complicate both of them and probably achieve neither. So that's a long shot at best.

In other news, Ericsson has also spiked, as if Nokia's infrastructure services suddenly pose a smaller threat. That flies in the face of the Alcatel reaction, which signals the exact opposite market change. In my view, Ericsson shares deserve to trade lower today.

BlackBerry (NASDAQ: BBRY  ) shares have gained a modest 1.7%. That's another head-scratcher. Are investors hoping for another multibillion-dollar buyout, this time in Canada? If so, then they're forgetting that the big names with decent buyout budgets already have their hardware needs covered.

Do they expect the integrated Microsoft-Nokia combination to sell fewer handsets in BlackBerry's core markets in the developing world? Then they didn't read the part of the deal announcement stating that Microsoft will manage Nokia's old feature-phone products, too. If anything, BlackBerry just gained a stronger rival.

The true winners and losers will materialize in the long term. Today, only the Microsoft and Nokia swings make any sense.

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  • Report this Comment On September 03, 2013, at 2:24 PM, techy46 wrote:

    Not good for Microsoft? MS is basically getting the best half of Nokia for $4 per share. There is no way MS could've built inhouse what they are acquiring from Nokia. The mobile devices are going to have sucj narrow margins that MS has to b uild the devices to enjoy both hardware and software margins like Apple. Only Samsung has the luxury of free Android software supported by Google's advertsing model. This is the only way Microsoft and Nokia could both come out winners.

  • Report this Comment On September 03, 2013, at 2:49 PM, will1946 wrote:

    It is good for both of them, just as Ballmer said. Otherwise, why would Microsoft have done it? They are not known for charity.

  • Report this Comment On September 03, 2013, at 2:53 PM, gilsh wrote:

    Actually, the BBRY's optimism (if related) is not unbased. MSFT has little interest in non-Windows hardwares, if any.

    This means that although the entire NOK phones division was purchased, the non-smartphones sections will most probably be wound down, and the staff would be turned to other targets - smartphone/tablet/smartwatch/smartgadgets R&D and production, but only of the kind that runs Windows, and is deeply woven into MSFT's eco-system.

    Looking around, the only immediate earner from this change is BBRY. I've been long on BBRY due to its strength in the developing world, and its unique position as the only supplier of a true smartphone with a builtin-keyboard which is a huge advantage in the developing world, where for many the smartphone is the only computer, but a possible future without a heavy-hitter as NOK in these markets, makes BBRY much stronger.

  • Report this Comment On September 03, 2013, at 4:05 PM, Chippy55 wrote:

    Microsoft either hit a home run or struck out swinging, only time will tell. But here's one thing I'm certain of: One third of those 30,000 Nokia jobs is gone simply from duplicity of effort. With email and mobile computing and Microsoft's penchant for thinking they have the brightest and smartest peeps on the planet (remember the drive-by media hysteria that Bill Gates was "draining" the U.S. of all it's brilliant engineers by hiring thousands of seniors right out of college, and the media turned on him for depriving the U.S. government of intellectual pencil pushers? Pepperidge Farm Remembers) they will simply cut 1/3 of the work force without batting an eyelash. Does Gates or anyone at Microsoft need the money? It's a rhetorical question. Just look at Buffet's recent purchase of HJ Heinz which was selling for around $60 per share and then the 82 year-old billonaire swooped in and offered a measly 20% premium and took the ketchup maker private, and axed hundreds of jobs in the process, lifelong dedicated employees who simply wanted a job in this economy and to live off the dividends of the stock that they've managed to purchase over the past 20, 30, 40 years. Doesn't Buffet have enough money?

    I'll try and stay as far away from Microsoft products as well as any Heinz products. And it would have made more sense in my opinion if Microsoft would have made a bid for Blackberry with it's 5,100 patents and the safest, most secure OS on the planet. Time will tell II.

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