This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why Microsoft's Decision to Buy Nokia Is Bad (Update 1)

Stocks in this article: MSFT NOK AAPL GOOG

Updated from 8:48 a.m. to include comments regarding ValueAct being aware of the deal in the seventh paragraph.

NEW YORK ( TheStreet) -- Microsoft's (MSFT) decision to purchase Nokia's (NOK) devices and services division has broader implications for the company than just additional revenue, operating expenses and how the company will look in the future. It's about the next CEO as well.

Former Nokia CEO Stephon Elop, who had previously been a part of Microsoft, as head of Microsoft's Business Division, responsible for Microsoft's Office business, will now be head of Microsoft's Devices team. Elop is now clearly the front runner for the horse race to replace Steve Ballmer, and that's not a good thing for Microsoft, or its shareholders.

In the press release announcing Ballmer's retirement, the company clearly hinted that a hardware CEO would be forthcoming, judging by the wording of the statement. "My original thoughts on timing would have had my retirement happen in the middle of our company's transformation to a devices and services company," Ballmer wrote in the press release. "We need a CEO who will be here longer term for this new direction."

It's abundantly clear that with this purchase, and bringing Elop back to the fold, Microsoft is trying to take on Apple (AAPL), and to a lesser extent Google (GOOG) by becoming a complete end-to-end corporation for both hardware, software and services. However, one of Microsoft's largest shareholders, ValueAct Capital, has repeatedly talked about Microsoft becoming the largest cloud computing company in the world.

Microsoft and ValueAct recently reached a cooperation agreement that will allow for regular meetings between Mason Morfit, president of ValueAct Capital, and selected Microsoft directors and management to discuss a range of significant business issues. The agreement also gives ValueAct Capital the option of having Morfit join the Microsoft board of directors beginning at the first quarterly board meeting after the 2013 annual shareholders meeting.

Perhaps going in the direction ValueAct has stated would be best for Microsoft, for a variety of reasons. Not only do software companies get higher multiples from the market, but it would continue to focus on Microsoft's software business (the transition of Office to Office 365, SkyDrive, etc.) as an annuity stream, as so many cloud computing companies are. The subscription and services revenue of companies such as (CRM), while significantly smaller than Microsoft, affords salesforce a higher multiple from the market, due to higher margins and visibility. That's something Microsoft has struggled with for years. Based on forward estimates, Microsoft's earnings multiple is just over 11 times earnings, and with additional hardware revenue, that may come down in the future, especially if execution risk becomes a factor.

On this morning's conference call to discuss the deal, Microsoft said that ValueAct was not made aware of the deal.

While companies don't have to disclose every purchase to shareholders, it does seem like it would've been a good start to the relationship between the two parties, especially seeing as Morfit will likely join Microsoft's board later this year.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs