MorningWord 9/3/13: Why Buy the Cow When You Already Get The Milk For Free? $MSFT

by Dan September 3, 2013 9:26 am • Commentary

MorningWord 9/3/13:   In case you missed it, MSFT is taking a page out of GOOG’s book and “buying the cow, despite getting the milk for free (basically free)” with their $7 billion purchase of NOK’s phone division and related patents.  Remember GOOG’s $12.4 billion purchase of Motorola Mobility back in the first half of 2012?  They do. Because they are still sucking wind with it. MSFT has stated in a presentation detailing the deal (here) that the deal will lower gaap earnings per share this year (fiscal 2014) by .12, fiscal 2015 by .05 and will be accretive in 2016.  The deal breaks even if the MSFT can accelerate Windows smartphone sales from 30 million a year to a hopeful 50 million, while producing annual cost synergies of $600 million within 18 months.  I can’t speak to whether or not this will be a financially successful deal given the current projections, my assumption is that the financial targets that make the current purchase price palatable are likely aggressive, and as was the case with GOOG/MOT the goal line may move a little bit as the integration begins.

One thing I am fairly certain on though is that this deal, the second largest in the company’s history (behind the 2011 acquisition of Skype), is likely to make an already uncertain situation (given Ballmer’s intention to vacate the CEO roll within 12 months), that much more uncertain.  Unless Ballmer’s replacement will be an internal candidate, from either MSFT or NOK, who in their right mind would sign on to fix what is becoming and an increasingly transitional story.  Ballmer has staked his reputation (whats left of it) on the fact that MSFT WILL become a device and services company as desktop computing might as well be the plague of the new techno-age.

As with GOOG, I just don’t get why MSFT risks alienating all of the hardware partners that they rely so much on to license their existing software for all sorts of devices.  AAPL has made their bed, and it is one that they have slept lived in for decades now, they have foregone market share for control of the entire experience, this was a strategy that almost sunk the company back in the 1980s and 90s, and ironically it was MSFT who bailed them out with a much needed cash infusion in 1997 (shortly after Jobs return to AAPL) and a commitment to develop software for Macintosh, possibly ensuring its future relevancy.   While AAPL re-foccused the smartphone market with the intro of the iPhone back in 2007, and has enjoyed the lionshare of the profit in the industry, they have done so at the behest of market share.  By the latest IDC data, Android commands 79% market share, iOS from AAPL at 13% and Windows at 3.7%.

So why in the world would MSFT want to buy NOK, who they already have exclusive software distribution with and risk other hardware competitors shunning Windows mobile for Android?? Doesn’t make a whole heck of a lot of sense to me, especially when you consider the agreement that MSFT/NOK previously had in place was for $1 billion.  Does MSFT, the company that brought you the ZUNE and the SURFACE really think they are going to be able to innovate in the smartphone space now that they can streamline both hard and software??

Well it won’t be a Balmer’s problem, but it will be he is legacy and I doubt that today’s announcement will do much to change what was already fairly clear upon his resignation, that his tenure has been a failure.

I guess I would make one last point, the purchase price is really a drop in the bucket for MSFT when you consider how much of their $77 billion in cash is overseas, they can afford to take a shot on a trans-formative deal for 10% of that balance and see what happens, so the 4.6% decline out of the gate seems a bit overdone, but yet I thought the nearly 10% gains on the announcement of Ballmer’s retirement was even more overdone!