Microsoft's Acquisition Plans For Nokia’s Hardware Division Fell Through; Is Huawei Eyeing It?

Microsoft (NASDAQ:MSFT) was looking to buy Nokia’s (NYSE:NOK) hardware business in a bid to gain a foothold in the smartphone market, a Wall Street Journal report released Wednesday said, adding that the plan was dropped after a failed closed-door discussion in June.

Microsoft and Nokia held talks in London earlier this month and almost made an agreement over a potential acquisition of the Finnish phone-maker’s device division by the Redmond, Wash.-based tech giant, sources told the Wall Street Journal.

Regardless of “significant progress in a plan,” Microsoft decided to drop the idea because of the price that Nokia asked for, and the company’s poor position in the smartphone market, where it trails bigger players such as Apple and Samsung, the Journal added.

Nokia, with a current market capitalization of around $14.42 billion, is struggling with its sales. The company reported weak earnings in the first quarter of 2013 as its smartphone shipments were down 32 percent with just 6.1 million smartphones shipped in total. In comparison, market leader Samsung reportedly shipped 60 million smartphones during the same quarter.

In 2011, Nokia and Microsoft joined hands, under which Nokia CEO Stephen Elop agreed to make Windows Phone the exclusive operating system for the company’s smartphones. It was thought that adopting Microsoft’s Windows Phone as the main platform for its smartphones could help Nokia make better devices to compete against smartphones powered by Google's Android.

However, the move did not pay off as expected. According to recent Gartner figures, phones using the Windows Phone operating system accounted for only 2.9 percent of global smartphone sales to end-users, in the first quarter of this year.

At the same time, Nokia, which was once the world's largest mobile phone seller, could not even make it to the top five smartphone makers list as companies like Huawei (SHE: 002502) and ZTE (SHE: 000063) managed to outperform it. The numbers reflect that both Nokia and Microsoft are finding it tough to stay alive in the increasingly competitive smartphone market.

There may be other players waiting in the wings to take Microsoft's place as a potential suitor for Nokia. Financial Times reported on Tuesday that Chinese tech giant Huawei may consider buying the Finnish firm.

“We are considering these sorts of acquisitions; maybe the combination has some synergies but depends on the willingness of Nokia. We are open-minded,” Richard Yu, chairman of Huawei’s consumer business group told FT.

Yu did not announce clear plans, but his “bullish comments” indicate that because of the company’s rapid progress in the mobile phone market, it is getting ambitious in its race against heavyweights such as Samsung and Apple, the report added.

“Twenty years ago, we were nothing but now we have the best quality [phones] and our customers say we are the best… We want to shorten the gap with competitors. We want to lead,” Yu said.

Nokia's stock, which has lost 2.5 percent this year, rose almost 3 percent to as high as 2.97 euros on the Helsinki stock exchange on Thursday, following the Journal's report, according to Bloomberg.