Should Microsoft Buy Nokia?

investment opportunityApple Inc. (NASDAQ/AAPL) appears to be tightening its grip on the smartphone market on news that former high-flying cell phone maker Nokia Corporation (NYSE/NOK) is hurting. The Finnish company seems to be on its way down. Recently, Nokia announced it would be axing 10,000 jobs in its struggle against Apple and Samsung.

Nokia has seen about 90% of its market value lost since the launch of the Apple “iPhone” five years ago. And Nokia’s once-promising venture with Microsoft Corporation (NASDAQ/MSFT) building the new smartphones built on Microsoft’s “Windows 8” mobile platform has not done well, as Apple and Samsung continue to dominate.

With the problems at Nokia, Microsoft will need to find another avenue to drive its business in the lucrative smartphone and tablet markets. The company’s recent venture in paying $300 million for a 17% stake in a new division of troubled Barnes & Noble, Inc. (NYSE/BKS) that includes the “Nook” e-book reader and downloadable material was a tiny step in this direction.

There is speculation that Microsoft may try to build its own tablet; but, at this stage of the game, it may be too little, too late. Apple remains the “best of breed” and will not be easily toppled, as I discussed in Apple: This Technology Stock Still Has its Mojo.

Samsung also has an excellent tablet that is gaining wide acceptance. Just ask Dell Inc. (NASDAQ/DELL) and Hewlett-Packard Company (NYSE/HPQ) about the competitive advantage that Apple has. Dell is getting slammed in the sale of its PCs and laptops, as the demand for tablets continues to pick up with increased functionality.

An option that could be in the works for Microsoft is the acquisition of Nokia and its 10,000 patents. With a market cap of $9.22 billion, it would not be a stretch for Microsoft to buy Nokia. If the company were to pay a 50% premium, this would mean a cost of about $14.0 billion. With $45.0 billion in free cash, Microsoft has the financial ability to acquire Nokia. The questions are: does it make sense and can Nokia be turned around under the leadership of Microsoft?

Maybe Microsoft can turn Nokia around and make a smartphone that can challenge Apple and Samsung. Nokia has the patents and developers. It just needs some vision and a lot of luck! An attractive point of interest is that Microsoft owns the hugely popular “Skype” communication tool that competes with Apple’s “FaceTime.” I love Skype and think Microsoft needs to push this product.

Just imagine the investment opportunity for Microsoft given the size of the global cell phone market. There are estimated to be over five billion cell phone users, according to the United Nations. That is a lot of phones, so the battle for market share will be intense.

The demand for smartphones will continue to grow rapidly, as we see more and more content and applications move to the mobile phone. Mobile broadband is becoming more significant. There are estimated to have been over one billion broadband subscribers in 2010, according to the International Telecommunication Union. This is why smartphones are becoming more critical products and why Microsoft needs to be there.

My market view is that Microsoft needs to do something in order to survive and grow. The company’s strategy to push into mobility and gaming adds some spice to the stock, which still trades as a commodity tech stock at 9.70X its fiscal 2013 earnings per share. To deserve a higher valuation, Microsoft will need to add some business with significant potential.