Microsoft to Buy Nokia’s Mobile Business for €5.44bn

Microsoft is buying Nokia’s mobile phone (Devices & Services) business for €5.44bn (£4.6bn). The deal will also see Microsoft license Nokia’s patents and licence and use the Finnish firm’s mapping services. It will also see Nokia CEO Stephen Elop return to the fold – he has been touted as one of the favourites to replace outgoing Microsoft CEO, Steve Ballmer – together with other senior Nokia executives, including Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber. 

Microsoft is paying €3.79bn for Nokia’s Devices & Services business, and €1.65bn to license Nokia’s patents. The transaction is expected to close in the first quarter of 2014, subject to the usual approvals and conditions.

Microsoft CEO Steve Ballmer described the deal as: “a bold step into the future – a win-win for employees, shareholders and consumers of both companies”. In reality, it’s about as good an outcome as Nokia could have hoped for, given the amount of ground it has lost over the past few years to other handset makers. 

Risto Siilasmaa, who was appointed interim CEO at Nokia following the announcement, described the deal as: “an important moment of reinvention” and said that Nokia could now build its next chapter from a position of financial strength. 

The details

Under the terms of the agreement, Microsoft will acquire substantially all of Nokia’s Devices and Services business, including the Mobile Phones and Smart Devices business units, which includes the Lumia brand and products and the Asha entry-level smartphone range. 

The deal also includes Nokia’s design team, operations, including all Nokia Devices & Services-related production facilities, Devices & Services-related sales and marketing activities, and related support functions. At closing, approximately 32,000 people are expected to transfer to Microsoft, including 4,700 in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide. The business units Microsoft is buying generated an estimated €14.9bn, or almost 50 per cent of Nokia’s net sales for the full year 2012.

Nokia will retain its patent portfolio and will grant Microsoft a 10-year license to its patents at the time of the closing. Microsoft will grant Nokia reciprocal rights to use Microsoft patents in its Here services. In addition, Nokia will grant Microsoft an option to extend this mutual patent agreement in perpetuity, while Microsoft will become a strategic licensee of the Here platform, and will separately pay Nokia for a four-year licence. As part of the transaction, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm, as well as other licensing agreements. 

Nokia will continue to own and manage the Nokia brand, by which we think they are referring to what’s left of Nokia’s business, i.e., the network equipment business, the patent portfolio, and the Here location-based services arm. 

Microsoft is also making €1.5bn available to Nokia in the form of three €500m tranches of convertible notes that Microsoft would fund from overseas resources, should Nokia decide to draw down on funds, in which case Nokia would pay back these notes to Microsoft from the proceeds of the deal upon closing. The financing is not conditional on the transaction closing. 

As a further sweetener, or scraps from the table depending on your point of view, Microsoft has chosen Finland as the home for a new data centre that will serve Microsoft consumers in Europe. The company said it would invest more than a $250m (£160m) in capital and operation of the new data centre over the next few years, with the potential for further expansion over time.

David Murphy writes

The Microsoft Nokia deal is a sign both of how desperate Microsoft is to make a success of its mobile business, and how desperate Nokia is just to survive. In 2007, Nokia enjoyed a 40 per cent share of the handset market. In Q2, 2013, according to Gartner, that figure stood at 14 per cent, with its smartphone share just 3 per cent. Only BlackBerry can rival the once-trailblazing Finnish company in losing its way, missing the boat, losing the plot etc. 

In the three years since Stephen Elop was appointed CEO, Nokia’s share price has collapsed as spectacularly as its market share has fallen. Yet not only is Elop destined for a return to Microsoft, many are tipping him for the top job when Steve Ballmer leaves within the next 12 months. Strange.

At least shareholders reacted positively to the deal; Nokia’s share price jumped 45 per cent on the news. For all the grandstanding from both companies’ top brass however, in terms of challenging the dominance of iOS and Android, this looks less like the coming together of two powerhouses, and more like a last desperate throw of the dice.