Microsoft Corporation (NASDAQ:MSFT) has taken a lot of flak for its recent acquisition of Nokia Corporation (NYSE:NOK)’s hardware business, but the criticism may not be entirely valid. Microsoft burned a lot of cash on the deal, and it will burn more keeping it running over the next year or two, but there are reasons for the acquisition.
A new report from Bernstein highlights the advantages that Microsoft Corporation (NASDAQ:MSFT) has secured in the Nokia deal. The bottom line for analyst Mark L. Moerdler, who authored the report, is that Microsoft’s real business, Windows and Office, could have been lost if the company had not purchased Nokia.
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Microsoft Corporation (NASDAQ:MSFT) has very little smartphone business, and the bit it has was paid for in subsidy to Nokia Corporation (NYSE:NOK). Unless Microsoft wanted to continue shelling out money to Nokia Corporation (NYSE:NOK), it would have to let its smartphone business die.
If Microsoft Corporation (NASDAQ:MSFT) was to let the smartphone business die, it would reflect very poorly on the company’s other offerings. Microsoft Corporation (NASDAQ:MSFT) wants to offer a whole ecosystem in order to take the entire enterprise section of the market. If the company doesn’t offer a good mobile option to clients, it looks much weaker on that front.
Microsoft Corporation (NASDAQ:MSFT) needs a smartphone to protect its entire Windows division. If consumers aren’t willing to put up enough money to keep the business going, Microsoft Corporation (NASDAQ:MSFT) is fine with burning cash to keep the business. Microsoft is all about Windows and all about enterprise, even when it doesn’t look that way.
Despite the argument in favor of the acquisition, Bernstein is still negative on the move. The Nokia acquisition may be in the long-term interests of Microsoft Corporation (NASDAQ:MSFT), but it is not in the medium-term interests of shareholders. That means that although there are reasons for the acquisition, it doesn’t portray the company as particularly strong.
Microsoft Corporation (NASDAQ:MSFT) might be able to turn the Windows Phone around, but it’s going to cost the company a huge amount of money. The firm can not rely on third party manufacturers, and the market is getting more competitive every year.