Will Microsoft Save Nokia?

Nokia (NYSE:NOK) has faced a rough year as the launch of its Lumia mobile phone failed to revive sales. Nokia’s shares have fallen 90 percent in five years, and it’s debt has been rated junk by two of the three major rating agencies. Analysts attribute Nokia’s decline largely to its late response to Apple’s (NASDAQ:AAPL) iPhone, but many believe that a partnership with Microsoft (NASDAQ:MSFT) is Nokia’s last chance for survival.

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In the past, cellphone makers have typically favored Google’s (NASDAQ:GOOG) Android or have opted to use their own operating system, as Apple has. This phenomena puts Microsoft in the position to benefit greatly from a relationship with Nokia. A partnership with Nokia will be the computer giant’s first major break into the smartphone market after a decade of heavy investment.

Many anticipate that Microsoft will swoop in to rescue Nokia from financial difficulties if needed. Currently, Microsoft is paying Nokia $1 billion a year to use its software on Lumia smartphones. If Nokia’s problems intensify, support could extend well beyond that amount. While Microsoft has nearly $60 billion of cash on its balance sheet, it is highly unlikely the company will acquire Nokia. According to investment bankers familiar with the technology sector, support is more likely to take the form of an inter-company loan or an equity stake, rather than a full takeover. In the past, the computer giant has steered clear of the hardware business in an attempt to avoid competition with manufacturers that use its software.

Many investment bankers deem Nokia an unlikely target for other cellphone manufacturers because of its now deep integration with Microsoft. Nokia is not perceived as a target for private equity because it is still too expensive and volatile. Nokia could potentially sell off assets to raise some much needed liquidity, but that scenario has raised some skepticism.

Analysts have said that potential buyers could be attracted to Nokia’s intellectual property portfolio that is considered the best in the industry. But Nokia CEO Stephen Elop has said that he is not planning any wider patent sales. It is also highly unlikely Microsoft will urge Nokia to sell its patents or let them fall into Google’s. Nokia could try to put half of its Nokia Siemens Networks up for sale again, but that process proved unsuccessful for Siemens (NYSE:SI) and Nokia in the past, and there is no reason for that endeavor to work now with no buyers in sight.

Recently, Nokia has been engaged in talks to sell its British luxury subsidiary Vertu, which manufactures the world’s most expensive mobile phones. Vertu would generate a few hundred million euros if sold to private equity firm Permira. Nokia is not expected to sell off any assets other than Vertu.

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