“What’s good for windows phones will be good for the Windows ecosystem,” said Steve Ballmer to CNBC regarding the company’s acquisition of Nokia’s services and device business. He went on to explain that this deal will help Lenovo and Dell. Of course he said this precisely because this strategy is going to cause problems with Microsoft’s relationship with other hardware manufacturers the company relies on. The goal of course is to the thread the needle – similar to Google, by producing hardware and licensing Android to others.
Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s Devices & Services business, and EUR 1.65 billion to license Nokia’s patents, for a total transaction price of EUR 5.44 billion in cash. Microsoft will draw upon its overseas cash resources to fund the transaction. The transaction is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders, regulatory approvals and other closing conditions.
Some analysts believe access to these fundamental mobile device patents will allow Redmond to produce even cheaper smartphones.
“It’s a bold step into the future – a win-win for employees, shareholders and consumers of both companies. Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services,” said Steve Ballmer, Microsoft chief executive officer. “In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”
“We are excited and honored to be bringing Nokia’s incredible people, technologies and assets into our Microsoft family. Given our long partnership with Nokia and the many key Nokia leaders that are joining Microsoft, we anticipate a smooth transition and great execution,” Ballmer said. “With ongoing share growth and the synergies across marketing, branding and advertising, we expect this acquisition to be accretive to our adjusted earnings per share starting in FY15, and we see significant long-term revenue and profit opportunities for our shareholders.”
Although this deal has been rumored for many years, critics are quick to point out the transaction may not really help Microsoft so much as Nokia may as well be a division on Microsoft based on the fact that the company has bet the farm on the Windows Phone OS.
This move comes at an interesting time – just days after Steve Ballmer announced he will step down as CEO of Microsoft within a year. This move may be the most important one the outgoing CEO could make and it sets the company up to become a much stronger mobile player.
Moreover, it allows Microsoft to produce a mobile device without the microscope the markets will place on its results. In other words, if the company was to produce its own phone, analysts and the media would be all over it immediately trying to ascertain how many devices were sold – comparing the results to Android and iOS.
Of course the fact that Redmond had to write down 900 million dollars’ worth of Surface RT tablets had to factor into the decision to buy an existing concern rather than going it alone.
At closing, approximately 32,000 people are expected to transfer to Microsoft, including 4,700 people in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide. The operations that are planned to be transferred to Microsoft generated an estimated EUR 14.9 billion, or almost 50 percent of Nokia’s net sales for the full year 2012.
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 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.
Microsoft will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four-year license.
Microsoft will also immediately make available to Nokia EUR 1.5 billion of financing in the form of three EUR 500 million tranches of convertible notes that Microsoft would fund from overseas resources. If Nokia decides to draw down on this financing option, 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.
This transaction shows how the rest of the market continues to chase Apple’s business model. Once it was thought that licensing software to multiple hardware companies was the winning model. After all, this is part of the reason the PC beat the Mac. But the success of the iPhone and iPad showed that controlling both hardware and software was a more successful strategy.
Of course Microsoft will “thread the needle” by continuing to provide its OS to hardware companies – just like what Google does with Android.
This deal also brings a relatively strong mobile line to Microsoft stores – meaning potentially getting much-needed traffic into them. If these additional customers end up buying video game consoles and other Microsoft products, this deal could make a lot more sense.