It's Full Steam Ahead for Microsoft and Nokia

On Aug. 30, the last trading day before Microsoft and its mobile partner Nokia announced the deal that will fundamentally change each of them, Nokia was trading at $3.90 a share; less than half its current share price. Microsoft's stock price initially dropped from $33.40 a share the day before the news to $31.88 a share the day of, before beginning its steady rise to over $38 a share today.

It didn't take long for Microsoft and Nokia investors to see the benefits each gained with the devices and services acquisition, and now that the regulatory bodies on both sides of the Atlantic have given their stamp of approval, it should become official soon. And for both Microsoft and Nokia, the sooner the better.

Rise of the phablet
As noted in a previous article, the potential for growth in the phablet market should have Microsoft fans feeling giddy. The trend toward larger screen smartphones -- phablets are generally considered to be in the 5-inch to 7-inch display size -- was already in full force before IDC confirmed the phablet craze with its latest data on the possible impact of phablets on mini-tablet sales.

In the third quarter of this year, phablet sales totaled 56 million units, equal to a whopping 22% of all smartphone sales. And phablets rapid growth is expected to continue: So much so that IDC suggests that the shift to phablets will negatively impact sales of mini-tablets. As IDC said in its report, "In some markets consumers are already making the choice to buy a large smartphone rather than buying a small tablet, and as a result we've lowered our long-term forecast."

And that brings us to Nokia's recently unveiled, high-end Lumia 1520 phablet and its low-cost Lumia 1320 brethren. As expected, the Lumia 1520 is flying off the shelves as Nokia works to address supply problems to meet high demand. With the holiday season upon us, Lumia phablets should continue to ramp up. Nokia's quarterly earnings release scheduled for next month is going to be interesting, to say the least, and you can bet Microsoft will be all ears.

Microsoft was late to the mobile party; there's no disputing that. But the timing for taking over Nokia's devices and services unit couldn't be better.

What's good for Microsoft is good for Nokia
Though hardly a reason to invest in any stock, it is telling that at least some analysts are beginning to get onboard the Nokia train. J.P. Morgan Securities is the latest to give Nokia a positive nod, reinitiating coverage with a price target of $10.80 a share, nearly $3 a share higher than Friday's $7.88-per-share closing price. Though J.P. Morgan's analysis of Nokia is the exception rather than the rule, don't be surprised to see that change over the coming weeks and months.

Why will Nokia analyst naysayers change their tune? Not only does the Microsoft acquisition serve its goal of diving headlong into mobile, for Nokia it sheds what was a money-losing business unit, strengthens its already impressive balance sheet, and allows it focus on maps and its profitable Nokia Solutions and Networks division (NSN). And let's not forget one of the most profitable patent portfolios around.

Final Foolish thoughts
It's not every day an acquisition of any size, let alone one valued at north of $7 billion, works out well for both parties. But that's the case with Microsoft's deal to buy Nokia's mobile business. Investors that have driven up the stock prices of each company since the news was announced got it right. But if you weren't able to enjoy their recent share price appreciation, there's good news: When the deal is done, both Nokia and Microsoft will be even better positioned than they already are.

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Fool contributor Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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