Microsoft takes on Nokia devices in €5bn deal

In a move that has been much predicted, Microsoft has announced that it is to buy  mobile device partner Nokia in a €5.44bn all cash transaction. The deal will see Nokia’s Devices & Services business transferred to the US firm as the company opens a new chapter set on “accelerating the Windows ecosystem”.

In an open letter from outgoing Microsoft CEO Steve Ballmer and now-outgoing Nokia CEO Stephen Elop, an ex-Microsoft man himself who many believe was brought on board to engineer such a deal, the pair said the move marked a “moment of reinvention”. This is something both companies need desperately, having rested on their respective laurels for far too long and found themselves struggling in recent years, in markets they both used to dominate.

“With the commitment and resources of Microsoft to take Nokia’s devices and services forward, we can now realize the full potential of the Windows ecosystem, providing the most compelling experiences for people at home, at work and everywhere in between,” the pair said.

Microsoft will acquire all of Nokia’s Devices & Services business, including the Mobile Phones and Smart Devices business units as well as personnel amounting to 32,000 staff, and operations including all Nokia Devices & Services production facilities, Devices & Services-related sales and marketing activities, and related support functions.

The operations that are to be transferred to Microsoft generated an estimated €14.9bn, or almost 50 per cent, of Nokia’s net sales for the full year 2012.

Nokia’s CTO organisation and patent portfolio will remain within the Nokia Group, however, and the company will grant Microsoft a ten-year, non-exclusive license to its patents. Nokia will grant Microsoft an option to extend this mutual patent agreement to perpetuity.

Microsoft has also agreed to a ten-year license arrangement with Nokia to use the Nokia brand on current Mobile Phones products but Nokia will continue to own and maintain the Nokia brand. Under the terms of the transaction, Microsoft has agreed to a ten year license arrangement with Nokia to use the Nokia brand on current and subsequently developed products based on the Series 30 and Series 40 operating systems.  Upon the closing of the transaction, Nokia would be restricted from licensing the Nokia brand for use in connection with mobile device sales for 30 months and from using the Nokia brand on Nokia’s own mobile devices until December 31, 2015.

Nokia, for its part, will remain in the mobility space and actively develop products. The company plans to focus on its three established businesses: NSN, the network infrastructure and services firm; HERE, a mapping and location services firm which grew out of the €8.1bn Navteq acquisition and which launched a connected car offering last week; and Advanced Technologies, the patents and licensing unit.

Microsoft will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four year license. This revenue stream is expected to substantially replace the revenue stream HERE is currently receiving from Nokia’s Devices & Services business internally.

Under the deal, Microsoft has agreed to make immediately available to Nokia €1.5bn of financing in the form of three €500m tranches of convertible bonds to be issued by Nokia maturing in five, six and seven years respectively. By way of protection, a $750m termination fee is payable by Microsoft to Nokia in the event that the transaction fails to receive necessary regulatory clearances.

To avoid the perception of any potential conflict of interest between now and the pending closure of the transaction, Stephen Elop will step aside as President and CEO of Nokia Corporation, resign from the Board of Directors, and will become Executive Vice President, Devices & Services.

Risto Siilasmaa will assume an interim CEO role for Nokia while continuing to serve in his role as Chairman of the Nokia Board of Directors.

Although it looks like an initial demotion for Elop, when his ‘mission’ is finally accomplished, it is expected that he will transfer back to Microsoft.

“For Nokia, this is an important moment of reinvention and from a position of financial strength, we can build our next chapter,” said Siilasmaa, Nokia Interim CEO. “After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders. Additionally, the deal offers future opportunities for many Nokia employees as part of a company with the strategy, financial resources and determination to succeed in the mobile space.”

The deal could also be the last hurrah for Microsoft boss Steve Ballmer, who’s own tenure has been somewhat spotted by Microsoft’s performance. Ballmer said last week he will step down from his role within 12 months.

“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,” Ballmer said.

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