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Putting Microsoft's Spending Spree Under the Spotlight

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Microsoft (NASDAQ: MSFT  ) has exhibited great volatility in its share price recently, defying what most investors normally expect from a megacap, blue-chip stock. Things got even wilder when the software juggernaut announced it would purchase Nokia's (NYSE: NOK  ) smartphone business as well as a portfolio of services and patents for a tidy $7.2 billion.

Microsoft is no stranger to headline-making deals, having spent billions over the past few years trying to expand its presence in mobile devices and social media.

With so much cash on the books, Microsoft can easily afford the billions it's been spending. But at the same time, the company has a duty to its shareholders to allocate its capital in the best way possible. Has the company succeeded on that front? Or, on the other hand, is Microsoft's spending spree simply a waste of shareholder money?

Ringing the registers, yet again
Upon announcing the deal, Microsoft Chief Executive Officer Steve Ballmer told reporters the deal represented a “signature event.” It's not entirely difficult to see why Microsoft and Nokia are so close to one another, since their partnership first began in 2011.

Since then, Nokia's Lumia devices have run on Microsoft's Windows software. However, Microsoft's flagship products, its Windows operating system and Office products, are still mostly run on personal computers, for better or worse.

Meanwhile, Nokia's stock surged as much as 40% intra-day after the announcement. Shares of Nokia reached their highest level in over a year, and it's easy to understand the optimism from Nokia's point of view.

The company, which was once a global leader in cell phones, has seen its business deteriorate in recent years. Nokia's devices have not kept up with the soaring popularity of the iPhone, Android, and other competing products.

Nokia was a $40 stock in late 2007, and booked 51 billion euros in sales and 8 billion in operating profit that year. As competition heated up and stole market share away from Nokia, its business collapsed, and its stock price followed suit. Today, Nokia trades for $5 per share and reported an operating loss of more than 2.3 billion euros on just 30 billion euros in sales in its last fiscal year.

Clearly, Nokia is in a dire situation, and needs something to breathe life back into it. Fortunately for Nokia, Microsoft was there to offer a helping hand.

For Microsoft, the move is just the latest in what has become a recurring pattern of making deals to finally expand away from personal computers in a meaningful way.

You'll recall that Microsoft purchased Skype in 2011 for $8.5 billion in cash, in a move designed to solidify Microsoft's real-time video and voice communications services.

The following year, Microsoft purchased Yammer for $1.2 billion in cash, with the hopes of expanding Microsoft's footprint in social media.

Unfortunately, ambitious as they were, the nearly $10 billion spent on these acquisitions have resulted in little tangible benefits thus far.

Add the Nokia deal to the mix, and all told, Microsoft has now spent more than $18 billion of shareholder money in just a few years.

The best use of shareholder capital?
In the end, I consider this deal a huge plus for Nokia. If nothing else, Nokia at least got itself some time to come up with devices that can more effectively compete with the industry leaders.

Whether this is enough to right the ship remains to be seen, but for now, Nokia will survive.

From Microsoft's perspective, these types of deals have skeptics. Microsoft's critics have long contended that the company is too tethered to the PC, and striking a deal with a company struggling as much as Nokia is probably isn't the long-term solution.

This is the likely reason why Microsoft shares fell 6% after the deal was announced.

Microsoft is immensely profitable, thanks to its ironclad grip on software. However, this deal will probably not realize Microsoft's stated goal of meaningful mobile penetration.

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9/28/2016 4:00 PM
MSFT $58.03 Up +0.08 +0.14%
Microsoft CAPS Rating: ****
NOK $5.74 Up +0.03 +0.53%
Nokia CAPS Rating: **