Why would Microsoft buy Nokia's cow when it's getting the milk for free?

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At first glance, it seems odd that Microsoft might want to buy Nokia outright. But it has one very good reason for considering the acquisition: Defense.

This week the Wall Street Journal cited unnamed sources who said that the companies had been negotiating over such an acquisition. Talks broke down over the question of price.

Microsoft and Nokia's current partnership would seem to be a better deal for Microsoft than buying the company outright. Microsoft already has a willing partner committed to using its Windows Phone operating system, and the companies have joint marketing and patent licensing deals in place. The relationship seems amiable – Microsoft has implied that it has some influence over the development of the Nokia phones.

If Microsoft were to buy Nokia, it would be taking on a big headache. Nokia has been shedding workers by the thousands and Microsoft would have to continue that process while trying to integrate the two businesses. Plus, it would shoulder the admittedly small risk of annoying other Windows Phone OEMs that might be displeased at Microsoft making its own phones. (Although that wouldn't be a major risk, since the bulk of Windows Phones shipped come from Nokia.)

But there are a couple of scenarios where a Nokia acquisition makes sense.

“Say if Nokia were acquired by another company that had no qualms about going toward Android,” said Chris Hazelton, an analyst with The 451 Group.

Earlier this week the Financial Times quoted a Huawei executive who said it is open minded to acquisitions of companies, including Nokia. None of the companies have commented on that statement and there doesn’t seem to be additional indication that talks have occurred between Nokia and Huawei.

But a Nokia acquisition by another mobile phone company could be a disaster for Microsoft. Most other phone makers primarily make Android phones. Without an anchor OEM like Nokia making Windows Phone, Microsoft loses any chance to grow the platform.

“It’s all about controlling the future for Windows Phone and ensuring that it would be better to own their own hardware and ensure the future for Windows phone than see it in the hands of a company that doesn’t have the loyalty that Nokia has to Microsoft,” Hazelton said.

Even if Huawei wasn’t a real threat, Microsoft could have been talking to Nokia ahead of the end of the companies' partnership. They haven’t discussed the terms of the deal – I asked Microsoft about the time frame for their partnership and it declined to comment. If the agreement is coming to an end, Microsoft could be interested in buying Nokia rather than let the struggling company look elsewhere to try to boost its business.

At the time the companies announced their partnership, Nokia said outright that it had considered Android and Microsoft. So at least at one point it was open to other platforms. Should the partnership be coming to a close, Microsoft might figure it’s better off buying Nokia than seeing it split its allegiance between Microsoft and Google.

There are other reasons too that a Microsoft acquisition of Nokia might make sense. As the Wall Street Journal noted, Microsoft has a big stash of cash overseas. Buying an overseas company like Nokia would allow Microsoft to use that cash rather than bring it back to the U.S., where it would incur taxes. This was one reason the Skype acquisition was attractive for Microsoft.  

This wasn’t the first time we’ve heard about acquisition talks between Microsoft and Nokia and likely won’t be the last. “I wouldn’t be surprised if further down the line Microsoft explored this again,” said Hazelton.

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