I think Rare would have went downhill no matter who purchased them (Activision or EA probably would have closed them years ago). As for Nintendo they didn't want to buy them when they were producing hits so it's really unlikely they would have wanted to after the brain drain started (which began years before Microsoft bought them).
You had people like David Doak, Martin Hollis, Steve Ellis, Karl Hilton, Graeme Norgate, Lee Ray, etc that left Rare to strike it out on their own and that was well before the Stamper brothers even put Rare on the market. So basically you had a lot of the talent behind Goldeneye and Perfect Dark leaving right before the rise of the FPS genre as the dominant genre on consoles.
Add to that the fact that the stakes were getting much higher with larger game budgets and the FPS genre being one of the few relatively "safe" ones, and even that genre had fierce competition, it's no surprise that Rare ran into major problems. Some people might argue that maybe a new Banjo would have saved them but consider the fact that the rise of multiplayer games was seriously impacting genres like platformers (well for studios other than Nintendo) so even that wasn't a sure bet to save Rare.
I suspect the Stamper Brothers were under pressure to produce hit games in that kind of environment and there was simply too many things working against them to make that happen. Then once they were gone the studio simply began to completely fall apart. As for Microsoft being too hands on they were basically trying to change the structure of the company to deal with large teams and they only tried that after having a hands off approach which was obviously failing.
For those that blame Microsoft, I'm curious, do you really think Microsoft could have changed the way the industry was heading towards multiplayer games (basically the reason for the rise of the FPS genre) by having Rare release platformers? In a world where games like Tomb Raider struggle to break even with 4+ million in sales how profitable do you think a 1-2.5 million selling AAA Banjo game would be?







