There's A Simple, Boring, Tax-Based Reason Microsoft's Nokia Purchase Makes Plenty Of Sense
You may have also heard that this is a dumb deal.
If not, Om Malik lays out all the reasons the deal is a "terrible idea." Largely, it seems he just thinks Microsoft's mobile efforts are toast and this deal does nothing to change that.
Malik is just espousing the conventional wisdom on the deal. As Herb Greenberg tweeted, everyone is lined up to hate on this deal.
Malik is probably right. Microsoft is probably doomed to being an unprofitable, third-tier player in the smartphone space.
The smartest thing for Microsoft is to break up into different pieces.
But guess what? That doesn't seem likely to happen.
As such, it had to something in the smartphone business.
Its options seemed to be: Buy Nokia for $7 billion. Or try to build its own smartphone business from scratch. Or completely give up on smartphones.
Giving up is not a real option. Building from scratch is insane. Therefore buying Nokia is really the only choice.
Couldn't Microsoft just leave Nokia alone? Couldn't the two companies have continued as a partnership?
Yes, and no.
Nokia was burning hudreds of millions in cash. It was probably going to go bankrupt in a few years. Microsoft needed to take over and infuse it with some cash. (In the announcement of the deal, Nokia said Microsoft would provide €1.5 billion in financing.)
Microsoft may have felt that it had to step in and save Nokia before it destroyed its distribution and manufacturing via cost cutting. Microsoft has the money to be patient.
Then, there's the fact that Microsoft and Nokia's original deal was about to expire. On a call with analysts and the press, CEO Steve Ballmer said 2014 was the re-commitment date. Nokia could have gone to Android, which would leave Microsoft with nothing.
So, yes the partnership could have rolled on, but it looked like Nokia was in trouble, or ready to bail, so no it couldn't have been business as usual.
This led to Microsoft spending $7 billion to just buy the whole handset business.
And here's the key thing about Microsoft's $7 billion - that money was just sitting around.
Microsoft has billions in cash that's off shore. Microsoft is not bringing that cash back to the U.S. because it will get taxed. So, the cash will never be a dividend. It will never be used for stock buybacks. It's just going to sit there.
Microsoft might as well use it to buy an overseas company like Nokia.
For that reason alone, this deal makes plenty of sense, despite all the hate.