Nokia exits mobile phone business
Microsoft Corp has agreed to buy Nokia Oyj's handset business and license its patents for €5.44 billion ($7.2 billion), casting together the lot of two technologies companies trying to stay relevant against more fleet-footed 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.
The devices and services unit, which accounted for half of Nokia's 2012 revenue, along with 32,000 employees, will transfer to Microsoft, the companies said.
Nokia Chief Executive Officer Stephen Elop, 49, will return to Microsoft after a three-year stint running the Finnish manufacturer. The move stoked speculation he may be a successor to CEO Steve Ballmer, who said last month he'd retire within 12 months.
“The question is whether combining two weak companies will get you a strong new competitor: it's doubtful,” said Paul Budde, a telecommunications consultant in Sydney.
“Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that.”
Nokia, based in Espoo, Finland, racked up losses of more than €5 billion over nine quarters as Elop's comeback efforts failed to eat into the dominance of Apple Inc and Google Inc's Android platform in the smartphone market. The stock has slumped more than 80 percent in the five years through yesterday.
As part of the agreement, Microsoft will pay €3.79 billion for Nokia's devices division and €1.65 billion for patents, according to a statement from the companies. The all-cash transaction, subject to Nokia investors' approval, is expected to be completed in the first quarter of 2014.
Nokia said it will book a gain of €3.2 billion, with the sale “significantly” accretive to earnings. It also said it aims to return its debt, which is ranked junk by all three major rating companies, to an investment grade. Chairman Risto Siilasmaa, who will become Nokia's interim CEO, said the company may return excess capital to shareholders.
The takeover is the largest for a wireless device maker after Google's purchase of Motorola's handset unit in 2012, according to data compiled by Bloomberg. For Microsoft, the deal including the payment to license Nokia's patents is its second-biggest behind the $8.5 billion purchase of Internet telephone company Skype in 2011.
With the latest sale, the original pioneers in the mobile-phone industry -- Motorola, Nokia and Ericsson AB -- have all ceased to be independent handset manufacturers or given up on the business. BlackBerry Ltd said last month it's considering putting itself up for sale.
Microsoft becomes the last major developer of smartphone operating systems to get into manufacturing. Apple makes its own handsets, which use its iOS operating system. Google's acquisition of Motorola Mobility gave it its own lineup of phones.
Microsoft's other recent significant move into hardware -- the Surface tablet -- has trailed expectations and the company wrote down inventory last quarter.
To break even on an operating basis, Microsoft will need Nokia to sell about 50 million smartphones a year, it said in a presentation. Nokia has a run-rate of about 30 million units. In the second quarter, Nokia sold 7.4 million smartphones under the Lumia line.
Microsoft acquired the Lumia brand to use with smartphones, while it will license the Nokia brand to use with low-end phones for 10 years, Elop said at a press briefing yesterday. Microsoft will later decide what to call its future smartphones.
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 that the company was “100 percent” committed to helping its manufacturing partners.
Ballmer declined to say whether Elop would become CEO, or had been a candidate to succeed him.
Ballmer called Nokia's Siilasmaa shortly after the new year to initiate discussions on an acquisition and the two met in February at the Mobile World Congress in Barcelona, according to Microsoft. Talks heated up in recent months and a deal was lined up before Ballmer announced his retirement last month, the company said.
Microsoft and Nokia have had a close relationship through Elop, who had run Microsoft's Office unit. He left the software maker in September 2010 to take the top job at Nokia.
In February 2011, Elop struck a deal with Ballmer to switch Nokia's smartphones from its own Symbian operating system to Windows Phone. In exchange, Microsoft ponied up more than $1 billion dollars to pay for Nokia marketing and developing products on Windows.
Nokia had the largest share of the mobile phone handset market until it was overtaken by Samsung in 2012, according to data compiled by Bloomberg.
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