Microsoft to acquire Nokia's handset business for $7.1 bn

Software giant Microsoft Corp today announced that it has struck a $7.1-billion deal to acquire the handset and services business of Nokia in order to catch up with market leaders Samsung and Apple Inc.

Under the deal, Microsoft will pay €3.79 billion to buy substantially all of Nokia's Devices & Services business, including its mobile phones and smartphone devices business units, its design team, all production facilities, absorb 32,000 employees, and related support functions, and also pay €1.65 billion ($2.2 billion) to license Nokia's patents, bringing the total deal value to €5.44 billion, or $7.18 billion.

Nokia's Smart Devices business unit includes the Lumia brand and products. Lumia handsets have grown in sales in each of the last three quarters, with sales reaching 7.4 million units in the second quarter of 2013.

As part of the transaction, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm, as well as other licensing agreements, but retain its own patent portfolio and license them to Microsoft for a 10-year period, as part of a separate, $2.2 billion patent deal.

Microsoft will also give Nokia a loan of €1.5 billion in the form of three €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.

Nokia, once the pioneer and undisputed market leader in mobile phones, will transfer 32,000 people to Microsoft, including 4,700 people in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide.

Stephen Elop, Nokia's CEO and other top executives will also join Microsoft, with Elop becoming executive vice president of devices and services.

The remaining parts of Nokia's businesses will remain in Finland and the company is expected to appoint a new CEO.

The business being sold generated sales of 53.7 million units in the second quarter of 2013 and  around €14.9 billion, or almost 50 per cent of Nokia's net sales for the full year 2012.

Microsoft said that it has selected Finland as the home for a new data centre that will serve Microsoft consumers in Europe. The company would invest more than a quarter-billion dollars in capital and operation of the new data center over the next few years, with the potential for further expansion over time.

''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

''We are excited and honoured 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,'' he added.

''For Nokia, this is an important moment of reinvention and from a position of financial strength, we can build our next chapter,'' said Risto Siilasmaa, chairman of the Nokia board of directors and, following today's announcement, Nokia interim CEO.

''After a thorough assessment of how to maximise 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,'' he added.

The proposed deal brings an end to Nokia's three-decades-long business of manufacturing and selling mobile phones and having a stranglehold in the market from 1998 to 2012.

The sale has not come as a surprise to analysts since Stephen Elop, a former Microsoft executive, took charge of Nokia in 2010 and months later formed a strategic partnership with Microsoft to use Windows Phone as its main operating system.

After Steve Ballmer announced two weeks ago that he would retire in the next 12 months, media had speculated that Elop would be one of contender for the CEO's post in Microsoft.

The acquisition may not strengthen Microsoft's position in the smartphone market since Samsung, Apple and devices using Google's Android operating system are already way ahead of its rivals, according to industry experts.

Windows Phone accounted for only 3.7 per cent of smartphone shipments, with Nokia accounting for a whopping 81 per cent of all Windows Phone devices shipped last quarter, according to research firm IDC.

Samsung holds 27.7 per cent of the global mobile handset market, while Apple holds 8.1 per cent, Nokia holds 15.8 per cent, and LG and ZTE hold about 4.6 per cent each.