Microsoft to move on Nokia in the ‘no brainer’ deal of the year?

Nokia is ripe as a $10 billion-plus takeover target for Microsoft.

This would be a terrific deal for Mr. Softy. For Nokia too, of course. Whether life follows logic is another matter…

In case you’ve been living under a rock, you’ll already know that Nokia, the Finnish cellphone company that once dominated the world, is having an even worse year than Greece. The company announced further deep job cuts Friday. Its business is imploding. Net sales from mobile phones plummeted a third in the first quarter.

Nokia stock has collapsed by more than 90% since the summer of 2007. The company is hemorrhaging money, and losing market share everywhere — to Apple’s iPhone and to all those smartphones running Google’s Android operating system.

In these circumstances, the natural instinct for most investors is to run a mile, and maybe that’s still good here. But for Microsoft this turkey is a plum (to mix my metaphors).

Why?

Microsoft is battling to break back into the mobile phone business. Right now the smartphone market is dominated by Apple and Android. And anyone who tells you these two companies meet every need is dreaming.

Personally, I won’t consider an iPhone because Apple refuses to make one with a physical keyboard. I don’t want an “on-screen” keyboard. So that’s that.

As for Android? I’ve used a number of these phones in the past and I can’t say I was overwhelmed. (It’s possible the problems I encountered were due to the hardware.) The operating system is very popular but it is not a world-beater.

Microsoft’s new offering, Windows Phone 7 (now 7.5, and 8) gets rave reviews. It is light years away from the old Windows Mobile/Pocket PC system, which was so bad that I wanted to smash my last device with a ballpeen hammer (actually I wanted to throw it at Microsoft chief Steve Ballmer, but he wasn’t around).

The problem with Microsoft’s new operating system is that even though it’s pretty good, it is a late entrant into a market already dominated by Apple and Android.

That’s where the Nokia takeover could come in.

Nokia is still a massive handset manufacturer: It sold 71 million devices even in the first quarter. And Nokia is good at hardware. Maybe the best “smartphone” I ever had was a Nokia e61 I bought back in 2006. Great voice quality, great keyboard, great connectivity. I once dropped it from about six feet on a London sidewalk and it bounced. Try that with your iPhone (or rather, don’t). The problem with the Nokia devices was always the tricky and finickity and annoying Symbian operating system, which was designed by Finnish geeks for Finnish geeks.

Last year Nokia’s new CEO, ex-Microsoft executive Stephen Elop, decided to try to save the company by switching it over to Windows Phone 7. The transition is proving very difficult, causing huge short-term losses. (Hence the current implosion).

But this company would be a great takeover. Nokia would be much, much stronger if it was owned by cash-rich Microsoft. Meanwhile, owning Nokia would give Microsoft a much better wedge it can use to force its way into the smartphone market.

And the deal wouldn’t cost much. Nokia’s market value has shrunk to $9 billion. But a look at the company’s balance sheet shows it had over $5 billion in net liquid assets in other words, when you count up all the cash and investments and then deduct the liabilities. On a net basis the company is only being valued at about $4 billion.

Microsoft makes that in operating cash-flow in about six weeks. By my math Microsoft is also sitting on net cash and investments of about $37 billion.

Nokia would be chickenfeed.

The only negative about this deal so far as I can see is that lots of Wall Street bankers are almost certainly recommending it to Microsoft CEO Ballmer. As a general rule in life you should never buy anything Wall Street bankers try to sell you. But I guess there are always exceptions. Even a broken watch tells the right time twice a day.

We made Nokia a Conviction Buy this week at the $2.50 level.