Microsoft Buy Nokia Smartphone Ops? Not Likely, Says Nomura

Shares of Nokia (NOK) are up 46 cents, or 9%, at $5.54 this morning. I mentioned one of the proximate causes earlier, an upgrade of the stock to Outperform by Credit Suisse’s Kulbinder Garcha.

Another proximate cause that I failed to acknowledge are rumors circulating that Microsoft (MSFT) may buy the smartphone operations of Nokia outright, leaving the mobile phones and networks businesses, even though the two are in a partnership struck a year ago that has already led to a substantial investment in Nokia on the part of Microsoft.

The current speculation appears to have begun with a tweet by tech observer and prognosticator Eldar Murtazin early this morning claiming that Nokia CEO Stephen Elop will be meeting with Microsoft CEO Steve Ballmer to “finalize agreement about Nokia smartphone unit,” adding “Bye Nokia.” That was followed with a whole bunch of subsequent tweets, which you can review here if you like.

Well, Nomura Equity Research analyst Stuart Jeffrey is not buying it. In a note to clients this afternoon he writes, “We don�t know if the above claims are correct and do not rule out a transaction of sorts between Nokia and Microsoft. However, we do not see a strong rationale for such a deal and would be surprised if it came to pass.”

It’s possible Microsoft wants to imitate Apple’s (AAPL) vertical integration of hardware, software and services a la the iPhone, he muses. But there’s no other reason than that, and he cites the example of Hewlett-Packard (HPQ) having bought Palm as an instance of integration “hindering success.” As far as possibly emulating Google (GOOG) with its purchase of Motorola Mobility (MMI), Jeffrey thinks that was really more about patents than integration.

Jeffrey cites a raft of reasons why Microsoft might not want to buy Nokia’s handset business. One is alienating other hardware makers.

But another is that the deal economics don’t seem to work, as they would raise “significant management credibility issues“ if Nokia were to try to go back to its own Symbian software after selling the smartphone business to Microsoft.

A $6 billion to $7 billion sale, which is all Jeffrey thinks the unit would get, would imply it had 10% smartphone market share, a $200 average price for those phones, and a 9% EBIT margin. But that would be less than what competitor Samsung Electronics (SSNLF) is trading for, he observes.

He concludes, “if Nokia sell-out at $6-7bn the company may not only undermine its credibility but also handicap its feature phone unit�s chances of future success.”

Jeffrey maintains a Neutral rating on Nokia shares and a �4.10 price target on the ordinary shares traded in Helsinki, which rose 7% today to �4.16.