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BofA/Merrill Analyst Offers Pros and Cons of Microsoft's Deal for Nokia Unit

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Microsoft's (NASDAQ: MSFT) recent $7 billion dollar acquisition of Nokia Corp. (NYSE: NOK) has caused much speculation about the software giant's future in the mobile sector. Kash Rangan, research analyst at Bank of America Merrill Lynch, earlier reported a useful spiel on the deal.

Rangan believes Microsoft must shift emphasis away from uncertain consumer sales of its Windows devices and onto its Business Division in order gain confidence from investors. He offers a rundown of how the Nokia acquisition could change this outlook, perhaps hindering or helping Microsoft.

Rangan's reasons for optimism are as follows.

  • Mobile network operators would enjoy having a third dog in the smartphone fight to better push back handset manufacturers.
  • Apple's release of the iPhone 5C and 5S, both premium-priced models, leaves a gaping hole for a more modestly-priced smartphones to enter the market, an opportunity for Nokia to break in.
  • Nokia's unit sales are trending as management had hoped.
  • The Nokia Lumia is a good product.
  • Microsoft now has offerings in every device category. It can roll out an integrated mobile platform across hardware, operating systems, and internet services.

Rangan also enumerates reasons for caution: Transatlantic M&A deals in the enterprise/consumer technology sector have tended to fail. History does not favor this sort of deal. </li> The Windows Phone store, Microsoft's market for apps, is way behind the Apple App Store and Google Play -- 170 thousand apps, versus 1 million. It may be too late for Microsoft to catch up. </li> Competing in the mainstream might require financial insecurity and sacrificing profits for market share. </li> Unifying Microsoft's technology platforms is a work in progress.Rangan believes the deal might accelerate market share gains for the Windows Phone and may be a small boost to Microsoft's earnings per share. However, he sees the deal as emblematic of company in transition. Leadership is changing hands, the business model is shifting, and now a new group of technologists is joining the team. Microsoft's growth potential, capital return, margin structure, earnings power -- these metrics radiate uncertainty before Rangan's eyes.</li>

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