Microsoft Buys Nokia Device and Services Business

Publisher�s Outlook

Microsoft Buys Nokia Device and Services Business

By Rich Tehrani, CEO, Group Editor-in-Chief, TMC  |  November 04, 2013

“What’s good for windows phones will be good for the Windows ecosystem,” said Steve Ballmer (News - Alert) 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 (News - Alert) 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.

“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,” said Microsoft CEO Steve Ballmer.

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 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 up the company 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 of Surface RT tablets had to factor into the decision to buy an existing concern rather than going it alone.

As part of the transaction, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm (News - Alert), 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 (News - Alert) 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 (News - Alert) and iPad showed that controlling both hardware and software was a more successful strategy.

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.

Edited by Stefania Viscusi