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Why Microsoft-Nokia merger makes sense

Posted: 18 Aug 2011     Print Version  Bookmark and Share

Keywords:acquisition  Google-Motorola  mobile OS  mobile platforms 

Google Inc.'s recent acquisition of Motorola Mobility Holdings Inc. for Rs.56,053.81 crore ($12.5 billion) is the latest step in the high-tech industry's evolution towards the creation of more compelling business narratives.

The changes in the wireless handset and tablet PC market as companies from both markets cross operating lines makes it apparent that the division between software and hardware is no longer justifiable.

By offering to acquire Motorola Mobility, Google literally demonstrated that the old walls companies have built around industry segments do not need to exist. Admittedly, there was justification for the industry to rip up the old vertical manufacturing system OEMs used until the last decade of the 20th century. However, simply because we do not believe an OEM needs to have a semiconductor division does not mean we can also justify the dividing lines between software vendors and hardware manufacturers.

This is why I believe Microsoft Corp. is next in line to make a major acquisition in the hardware space. The company has enough cash to fund any deal it wants—aside from buying Apple Inc. or Google, of course. If it wants to expand beyond the PC operating system market and make a big splash again in the consumer electronics sector, it should consider making a play for OS partner Nokia Corp.

The two companies need each other, and together they can become a tougher competitor in the wireless handset and tablet PC market. Microsoft already signalled its intention to move closer to Nokia by agreeing to a joint-development plan for Windows OS that would net its partner billions in support dollars. Also, Microsoft's Windows OS for mobile platforms hasn't done very well in the market so far and has badly trailed offerings from Apple and Google. If Microsoft swallows up Nokia, the relationship becomes more entwined, and both could benefit from the interplay of hardware and software.

Such a transaction would be a no-brainer for Nokia. CEO Stephen Elop's decision to abandon Nokia's Symbian operating system admittedly hurt the company, but that decision is now irreversible. Rather than try to untangle the relationship with Microsoft, the Finnish company should instead seek an even tighter engagement. Nothing can be closer than an acquisition that makes Nokia a business division within Microsoft.

Will investors support the arrangement? They may not like it at first, but it is clear already Microsoft is no longer in a fast-growing business, while Nokia appears to have run out of steam. Together, they would be a formidable presence in the fast-growing wireless mobility market and would be better able to compete against Apple, Google-Motorola Mobility and Samsung.

Sure, some Windows OS licensees may find the deal unpalatable, but many of these were already irritated at Microsoft's earlier announcement that it would help Nokia migrate to its platform. And, there aren't enough heavyweight companies supporting Windows OS, anyway. The few that are already in Microsoft's camp also have offerings that feature competing operating systems such as Google Android or internally developed platforms.

The idea of Microsoft buying Nokia isn't really that far-fetched. It is not a great mystery, either, that Google would offer to buy Motorola Mobility. Hewlett-Packard Co. acquired Palm Inc., absorbing its operating system and using this in its products. Research In Motion Ltd is not on the block today, either. But I wouldn't be surprised if some other company with a deep-enough pocket makes a play for the Canadian enterprise mobility company. At their current market capitalisation of Rs.1.08 lakh crore ($24 billion) and Rs.62,780.27 crore ($14 billion), respectively, Nokia and RIM are certainly affordable, having been trading at a discount for some time.

- Bolaji Ojo
  Editor-in-chief of EBN

  This story was originally posted on EBN.

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