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Muhammad Bazil
Muhammad Bazil
Articles (192) 

Is the Nokia-Microsoft Deal a Financial Win?

September 12, 2013 | About:

Nokia (NYSE:NOK) and Microsoft (NASDAQ:MSFT) share a surprisingly symbiotic relationship in the mobile market. Nokia owns about 85% of the Windows Phones market share, while the mobile company uses the Windows platform exclusively. Clearly, Nokia would currently have nothing without the Microsoft platform, and without Nokia, Microsoft would own about 0.5% of the smartphone market share in the U.S.

Microsoft’s reason for wanting to buy Nokia’s phone division, however, may not be immediately clear considering the capital and energy that Nokia has spent supporting the WP8 platform. Some experts believe that Microsoft’s acquisition plans may be motivated by fears that Nokia planned to replace WP8 with the Android OS, while others believe that Nokia’s underperforming stocks may have caused some concern. Either way, Microsoft acted quickly in order to save the WP OS at nearly the same time that Steve Ballmer announced his upcoming departure.

Interestingly, Nokia’s CEO Stephen Elop stepped down, causing many to speculate that Elop may be Ballmer’s replacement when the Microsoft CEO retires. Although Microsoft expects to lose $0.08 in share earnings during fiscal year 2014, the company expects to make up for that loss by the end of fiscal year 2016. The impact of the purchase on revenues and earnings, however, may not be as important as Microsoft’s balance sheet, which is related to the company’s upcoming dividend raise. This table (dollar values in millions) shows some key balance sheet ratios at the end of the past three fiscal years:

The U.S. cash — the sum of the short-term investments and the U.S. Held Cash — may be the most important statistic on the balance sheet table. The balance is a lot lower than it has been for the past two years, which could be critical, considering that Microsoft pays its dividend and purchases shares in U.S. funds. Paying with foreign funds or transferring the cash causes various tax and interest issues for the company’s shareholders.

This is where the Nokia deal comes into play because Microsoft plans to draw from overseas monetary resources to fund the deal. This could be expected since Nokia is based in Finland, but it also means that Microsoft can carry out this deal without using U.S. cash. This deal requires about 10% of Microsoft’s foreign cash resources and avoids the taxes and interest that the company would have to pay so as to transfer the money in order to buy a similar U.S. company. Considering that Nokia reported a 32% increase in Lumias sales in second quarter 2013, the 3.79 billion euro price tag seems relatively low.

Microsoft could really help its own cause when the company announces its next dividend within the next few weeks because the company is expected to announce a dividend raise. The dividend raise is expected to be 2 to 3 cents, with a quarterly dividend at $0.25 or $0.26 and an annual dividend at $1.00 or more. Microsoft could benefit from an even greater increase, raising the dividend to maybe $0.27 to $0.30 per quarter. This assumes that Microsoft does not plan to announce a large dividend buyback and that the company can afford such an increase. Since the company’s U.S. cash pile has decreased over the last couple of years, the Nokia purchase becomes a clear financial victory.

Microsoft could probably afford a dividend raise, but the flexibility would be limited if the Nokia purchase used U.S. funds. Microsoft's purchase of Nokia has analysts skeptical because many people believe Nokia to be a dying business. Although this deal alone probably will not transform Microsoft into a mobile powerhouse, it's a financial win for Microsoft because the deal did not involve U.S. cash resources, which Microsoft needs for its dividend and buyback. Microsoft took a positive gamble that involved foreign based cash resources.

The deal is a financial win because it shouldn't hurt Microsoft's dividend or buyback. Whether the gamble pays off in the long run remains to be seen, but a gamble acquisition could have been negative for shareholders if it needed U.S. funds.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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