Monday, September 9, 2013

Why Microsoft Bought Nokia - and the Implications for the Rest of the Tech Sector

Last month I highlighted a book published in 1996 written by technology writer Bob Cringley (whose real name is Mark Stephens) called Accidental Empires:  How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can't Get A Date.

Cringley has been following the tech space for a number of years, and has become one of the more astute observers of the group.

He also publishes a blog called I, Cringely which provides regular updates on tech companies.  His work has impact - apparently his recent criticisms of IBM have provoked Big Blue's management to forbid any employees to speak to Cringely upon penalty of dismissal.

Cringely's most recent post on Microsoft and Nokia was very interesting.  He writes that one of the big reasons that Microsoft bought the Finnish company was not because of any intense desire to own a cellphone manufacturer.  Instead, he thinks it was mostly driven by financial engineering decisions:

So why, then, did Microsoft buy Nokia? The stated reason is to better compete with Android and iOS, furthering Ballmer’s new devices and services strategy, but I think that game is already lost and this has more to do with finance than phones.

Microsoft, like Apple and a lot of other companies, has a problem with profits trapped overseas where they avoid for awhile U.S. taxation. The big companies have been pushing for a tax holiday or at least a deal of some sort with the IRS but it isn’t happening. So Apple, sitting on $140+ billion has to borrow $17 billion to buy back shares and pay dividends because so much of its cash is tied-up overseas. But not Microsoft, which just bought Nokia — a foreign company — with some of its overseas cash. Redmond said so today. That makes the real price of Nokia not $7 billion but more like $4.5 billion, because it’s all pre-tax money.

Not only is Nokia cheaper than it looks, those 32,000 Nokia employees coming over to Microsoft transform the company into a true multinational with all the tax flexibility that implies. Microsoft may never pay U.S. taxes again.

So if Cringely is right - and I am inclined to think that he is - we may start to see more tech mergers outside the U.S.

Which may also mean that one of the main legs of those bullish observers on the tech sector - that they are sitting on huge stockpiles of cash that will eventually be returned to shareholders - may be much weaker than many realize.