Report says Microsoft considered buying Nokia — would it make more sense now?

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A report from The Register suggests that in late 2011, Microsoft considered acquiring part or all of Nokia, to the extent that it even got permission to look through the company’s books to get a better sense of its financial situation. According to “well placed sources,” Microsoft backed away from the idea, because it wasn’t thrilled by Nokia’s balance sheets. But things have changed since then: Nokia’s share price has dropped nearly 40 percent in the last three months, which may make Nokia a more attractive buy-out or investment target.

And Microsoft may not be Nokia’s only suitor. Nokia’s shares jumped a bit last week on rumors South Korea’s Samsung was considering a buyout; Samsung has since denied it has any interest in Nokia.

Microsoft’s interest in acquiring part or all of Nokia is obvious: Despite having just been dethroned by Samsung as the world’s largest handset manufacturer, Nokia still sells millions of handsets, particularly in developing markets where Microsoft’s mobile technology doesn’t have a strong foothold. (Although, to be fair, Microsoft’s mobile technology doesn’t have a strong presence in major markets like the North America or Europe, either.) Acquiring Nokia would be a quick way for Microsoft to capture a significant chunk of the mobile ecosystem.

Nokia is also Microsoft’s preferred technology partner on Windows Phone, so Nokia has already lashed its fate to Microsoft’s technology, and vice versa. If Nokia were to fail, it would be a body blow to Microsoft’s struggling Windows Phone platform. If Microsoft were to acquire some or all of Nokia, it would bring some of Nokia’s mobile technology design expertise in-house, and enable Microsoft to create a more-vertical ecosystem that bears more resemblance to Apple’s — something Microsoft is already doing with Windows Phone and (soon) Windows RT, at least on the software side.

What’s more, Microsoft (or another company) can probably pick up Nokia for a bargain. Nokia has seen the value of its stock drop more than 90 percent in the last five years, from a high of $39.72 in October 2008 to a 15-year low of $2.84 on June 4 of this year. (Going back further is even more frightening: Nokia traded for $56.06 back in April of 2000.) In April, ratings agencies began downgrading the rating on Nokia’s bonds to junk status, making it even more difficult for the company to borrow money to continue operations. During the last five quarters, Nokia’s cash reserves shrunk by more than $2 billion. The company still has cash in the bank, but if its finances keep on their current track, the company could be out of money by the end of 2013.

If Microsoft balked at buying some or all of Nokia back in November, Nokia’s ever-lowering stock price may make it more appealing to Microsoft now. A major consideration, however, is whether acquiring Nokia (or part of it) would help or hurt the Windows Phone platform. As with Google acquiring Motorola, OEMs like HTC and Samsung will certainly be wary of competing with a Microsoft-owned manufacturer of mobile devices. Presumably, any hardware built under the same roof as the software would have an edge that OEMs couldn’t match. On the other hand, that bridge may already be burned: Microsoft’s installation of Nokia as its preferred Windows Phone partner has not exactly instilled faith in other companies building Windows Phone devices. Samsung and HTC, for instance, have largely released repurposed versions of devices originally built for Android. Aside from Nokia, OEMs have yet to make huge bets on Windows Phone. Microsoft may be wondering whether it’s time to pull the plug on creating an ecosystem of Windows Phone devices and just do everything itself.