Microsoft Becomes Smartphone Maker With $7.2 Billion Nokia Purchase

Just days after announcing the unexpected departure of CEO Steve Ballmer, Microsoft late Monday announced its plans to purchase Nokia’s mobile phone hardware business and the licensing of Nokia mobile patents in a combined deal worth $7.2 billion. The aggressive move to acquire the company’s primary mobile partner thrusts Microsoft directly into the smartphone business, a move that many analysts have long argued the company needed to make.

The deal breaks down to $5 billion for Nokia’s Devices and Services business, and $2.18 billion for the licensing of Nokia’s mobile technology and mapping patents. Mr. Ballmer’s prepared statement on the deal was delivered via a company press release:

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. 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.

Stephen Elop, Nokia’s CEO and former Microsoft executive, announced that he is transitioning to the role of Executive Vice President of Devices and Services (the division acquired by Microsoft) as part of the deal, a move that makes him a prime candidate to replace Mr. Ballmer as CEO of Microsoft. He also commented on the deal:

Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing and manufacturing. With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.

Microsoft CEO Steve Ballmer (left) with Nokia’s Stephen Elop

The acquisition is not entirely surprising; The Wall Street Journal reported in June that Microsoft had previously sought to purchase Nokia, but that the deal fell through in late-stage negotiations. With Mr. Ballmer’s impending departure, the changes at Microsoft – including the opportunity for Mr. Elop to assume the CEO role – likely rekindled talks.

Microsoft and Nokia have long been partners under the Redmond company’s mobile strategy. Some of the earliest and most highly-regarded Windows Phone-based devices have been manufactured by the Finnish firm. Despite their efforts, both have struggled in the mobile space against Apple’s iOS and Google’s Android.

With Microsoft now poised to produce its own phone hardware, the company will hope to generate the same type of unified experience that Apple does with its iOS software and iPhone hardware. Unfortunately, Microsoft’s first mobile foray into combined hardware and software, the Surface tablet, has been met with lackluster consumer interest, in addition to being disastrous financially.

For Nokia, the deal allows the company to restructure with a positive financial outcome. The company’s aforementioned struggles resulted in a $151 million net loss last quarter, and it will gain an expected $4.2 billion by offloading its phone business.

Al Hilwa, an analyst for research firm IDC, summarized the acquisition:

It is good for both companies to see it happen. Nokia has a highly evolved device design and manufacturing process which will benefit Microsoft greatly. This is simply the fastest path in front of Microsoft to achieve something like Apple’s vision on devices. The key to progress in this space does not change, namely will Microsoft be able to create critical mass with its platform.

The deal must first be approved by the shareholders of both companies and is expected to be finalized in the first quarter of 2014.