Published : 2013-09-03 13:45
Updated : 2013-09-03 18:20
|This Feb. 11, 2011 file photo shows Stephen Elop CEO of Nokia, left, with CEO of Microsoft Steve Ballmer, speaking in London. Microsoft says it is buying Nokia`s devices and services business, and getting access to the company`s patents, for a total of 5.44 billion euros ($7.2 billion) in an effort to expand its share of the smartphone market. (AP-Yonhap News)|
Microsoft Corp. agreed to buy Nokia Oyj’s handset business and license its patents for 5.44 billion euros ($7.2 billion), casting together the lot of two companies trying to stay relevant against fleet-footed technology rivals.
The deal changes the nature of both companies. Nokia is exiting from the mobile-phone business it once dominated, leaving it mainly as a network equipment maker. Microsoft, which became the world’s largest software maker on the back of its Windows operating system, is moving into hardware.
Nokia shares jumped as much as 48 percent in Helsinki trading. Microsoft is making its biggest foray yet into hardware as sliding personal-computer sales threaten the demand for Windows, and Nokia’s cash flow has been weakened as it loses market share to Apple Inc.’s iPhone and Google Inc.’s Android platform. While Microsoft Chief Executive Officer Steve Ballmer and Stephen Elop, his Nokia counterpart, called the deal a “moment of reinvention,” analysts aren’t so sure of its prospects.
“Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that,” said Paul Budde, a Sydney-based telecommunications consultant. “The question is whether combining two weak companies will get you a strong new competitor. It’s doubtful.”
Microsoft will pay 3.79 billion euros for Nokia’s devices unit and 1.65 billion euros for patents, according to a statement from the companies.
Nokia climbed as much as 1.44 euros to 4.40 euros and traded 45 percent higher at 4.30 euros as of 10:05 a.m. in Helsinki, giving the company a market value of 16.2 billion euros.
With the deal, Microsoft becomes the last major developer of smartphone operating systems to get into the manufacturing business. Apple makes its own handsets, which use its iOS operating system. Google acquired Motorola Mobility last year for about $12.4 billion, giving the company its own lineup of phones.
Yet the deal also raises questions as to whether Microsoft and Nokia will prop each other up or weigh each other down. Microsoft’s other recent significant move into hardware, the Surface tablet, sold below expectations so that it had to take a charge to write down inventory last quarter.
The deal also brings Microsoft’s CEO succession into the spotlight. As part of the purchase, Elop ― formerly a Microsoft executive ― will return to the Redmond, Washington-based company. Ballmer declined to say whether Elop would now become, or had already been, a candidate to succeed him as CEO.
Chairman Risto Siilasmaa will become interim CEO of Espoo, Finland-based Nokia. About 32,000 Nokia employees will also transfer to Microsoft. The devices and services business generated about 50 percent of Nokia’s net sales during 2012, worth an estimated 15 billion euros, the companies said.
The deal is the largest for a wireless device maker after Google’s purchase of Motorola’s handset unit completed in May 2012, according to data compiled by Bloomberg.
Microsoft agreed to pay about 0.35 times annual revenue compared with the median of about 1.4 times for 60 wireless equipment-maker deals tracked by Bloomberg. That also compares with the 0.77 times revenue Google paid for Motorola Mobility, the data show.
Google paid about 1.3 times annual operating income for the handset maker, while Nokia’s device and services business reported an operating loss last year, according to the data.
Ballmer called Nokia chairman Siilasmaa shortly after the new year to initiate discussions on an acquisition and the two met in February at tradeshow Mobile World Congress, according to a Microsoft spokesman. Talks heated up in recent months and a deal was completed before Ballmer announced his retirement last month, he said.
For Microsoft, the deal including the payment to license Nokia’s patents is its second biggest behind the $8.5 billion purchase of Internet telephony company Skype in 2011.
Microsoft will face a balancing act owning Nokia and keeping its other hardware partners, including HTC Corp. and Samsung Electronics Co., committed to its Windows Phone. Aiming to reassure other phone makers that Microsoft will still support them, Ballmer said Tuesday that the company was “100 percent” committed to helping its manufacturing partners.
The deal also pushes Microsoft into manufacturing facilities and workers, an area outside its expertise. The company has relied on contract manufacturers for products like Xbox, Surface and the chips in the Kinect motion sensor. It’s an area that has proved challenging for Google since acquiring Motorola as well.
After the sale to Microsoft, Nokia’s biggest business will be its unit selling wireless-network equipment to mobile-phone carriers, called Nokia Solutions and Networks. The unit has struggled amid intensifying competition from Sweden’s Ericsson AB and China’s Huawei Technologies Co. and ZTE Corp. The NSN division started a program in late 2011 to cut 17,000 jobs, or about 23 percent of its total.
Nokia said it will also keep its mapping and location services business, called Here, and its technology development and licensing division. (Bloomberg)