An investment analyst has written to Microsoft and Nokia urging them to partner for Windows Phone 7 handsets.

Berenberg Bank’s Adnaan Ahmad issued the note with his recommendations for Microsoft. Ahmad gets straight to the point in his memo to Nokia CEO Stephen Elop and Microsoft CEO Steve Ballmer. “Times are-a-changin” says Ahmad before reminiscing Nokia’s former glory days. “I remember the days when Nokia (with Jorma Olilla at the helm) ruled the roost, European market share was above 50% and US market share was in the 35% range. Well, those days are long gone, and as you so sweetly put it, Stephen, in your recent Q4 earnings release: Nokia faces some significant challenges in our competitiveness and our execution,” says Ahmad. The investment analyst pulls no punches and outlines what Microsoft and Nokia should do (Full PDF at FT.com):

1. Android a no-go for now. This may have been a good idea one to two years ago, but it is not today. You will never be able to catch up with Samsung, which should rule the Android show midterm given its economies of scale, product breadth (TVs, PCs, phones and tablets), as well as its captive component base. And that market is going to get even more crowded with China Inc (ZTE, Huawei et al) joining Sony Ericsson, HTC, Motorola and PC vendors. And more significantly, how is anyone going to differentiate on Android long-term?

2. Announce an EXCLUSIVE deal with your ex-colleague, Steve: you get access to their WP7 intellectual property (IPR) scot-free and access to the US market where your share has dived to the low single-digit level, and in so doing cut your bloated handset business R&D budget by at least €1bn, or 30%, which should add 300bps to your operating margin. Get rid of your own proprietary high-end solution (MEEGO) – it’s the biggest joke in the tech industry right now and will put you even further behind Apple and Google. Focus your high-end portfolio around WP7, and over time you can take the cost down (that’s Steve’s job and cost base) to get this into the mid-range market. Push your Symbian solutions into the low-to-mid-range smartphone market as quickly as possible to defend market share versus Android’s upcoming lowered cost ecosystem.

3. You are going to have to cut headcount severely in Finland, where Nokia accounts for around 7-8% of GDP and employment (including ecosystem), but I am sure the Government will be more amenable to restructuring with your share price down 70% since the introduction of the iPhone in 2007. It could obviously get worse if you wait. And the best time to announce it is now.

4. Tell the market by what time you expect the initial products from your exclusive deal with Steve to be released.

Nokia is reportedly in talks with Microsoft to look at offering Windows Phone 7 devices. The talks were kick started by Nokia’s new management. Stephen Elop, ex-Microsoft employee, joined Nokia last year as the company’s CEO. Elop admitted, during an earnings call last week, that Nokia needed to join a competitive ecosystem. “In addition to great device experiences, we must build, capitalize and/or join a competitive ecosystem,” said Elop.

Speculation over Windows Phone Nokia devices has been rife since his departure from Microsoft to Nokia. Ahmad’s memo adds more fuel to the fire on the Windows Phone 7 debate.