8 Companies Microsoft Should Buy

MILLBURN, N.J. (Stockpickr) -- I cannot tell you how often I hear someone say that Microsoft(MSFT) should purchase such-and-such company.

There is no doubt that Microsoft, which shows up on a recent list of Stocks Set to Rebound in the Second Half of 2011, is one of the most cash-rich companies in corporate America and the world, with about $50 billion in cash and short-term investments and another $11 billion or so in long-term investments. Typically, long-term investments are government or investment-grade corporate debt that matures in greater than one year.

Offsetting all of that wealth is nearly $12 billion in debt. Needless to say, Microsoft has a significant amount of liquid capital at its disposal. Furthermore, Microsoft's stock has a market capitalization of just under $210 billion, which only adds to its ability to acquire another company.

This raises the questions:

What companies should Microsoft acquire?

What companies should Microsoft spurn for acquisition?

First we need to understand exactly what Microsoft does. The company operates five segments:

1. Windows: the operating system and related software for personal computing
2. Servers and Tools: technological solutions and tools IT professionals
3. Business: software and services for enterprise users
4. Online Services: search and display advertising using Bing and MSN
5. Entertainment and Devices: XBOX and Windows Phone for mobile devices

The first three businesses listed above are Microsoft's strengths while the last two are less-than-stellar performers that trail many of the market leaders. Microsoft is glaringly absent or deficient in several up-and-coming segments of technology.

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With that in mind, what acquisitions make sense and which ones do not for Microsoft? Here's a look at a few companies Microsoft should consider buying -- and a few it should steer clear of.

What Not to Buy

There's some buzz that Microsoft has to buy Nokia(NOK) or Research In Motion(RIMM). Microsoft could easily purchase Nokia, with a market capitalization of $22 billion, or Research In Motion, with a market capitalization of $15 billion. The rationale behind those recommendations is that Microsoft is too far behind -- practically absent, even -- from the mobile telecommunications and tablet computing market and needs to do something fast.

I agree that Microsoft is way behind, but both Nokia and Research In Motion are both seeing their dominance in the handheld market shrinking rapidly. Furthermore, Research In Motion's entrance into the tablet market, the Playbook, is likely to be to the iPad what Microsoft's Zune was to the iPod.

Research In Motion was recently highlighted in "5 Big Losers Ready to Bounce," while Nokia shows up on a recent list of Value Stocks Buffett's 'Mr. Market' Hates.