Microsoft buys Nokia’s devices business, licenses patents and maps for $7.2 billion
Microsoft just announced its long-awaited move into the mobile phone hardware space: the software giant will acquire most of Nokia’s devices and services business for €3.79 billion ($5 billion), along with a license to Nokia’s patents for a further €1.65 billion ($2.2 billion), in a cash transaction expected to close in the first quarter of 2014. The €5.44 billion ($7.2 billion) deal is one of Microsoft’s largest to date, though, notably, it comes at a lower price than what Microsoft paid for Skype in 2011.
The move combines Windows Phone 8 with its most successful licensee and expands Microsoft’s first-party hardware efforts from Xbox, Surface, and accessories to mobile phones. 32,000 employees will make the jump from Nokia to Microsoft, including Nokia executives like CEO Stephen Elop, Jo Harlow, Juha Putkiranta, Timo Toikkanen, and Chris Weber.
For Nokia CEO Stephen Elop, the deal means a return to Microsoft, where he will lead an expanded Devices team, which, Microsoft CEO Steve Ballmer wrote in an email, “includes all of our current Devices and Studios work and most of the teams coming over from Nokia.” The acquisition follows Nokia’s strategic partnership with Microsoft in February 2011 and Microsoft’s new aim of becoming a “devices and services company.” It also feeds speculation that Elop may succeed Ballmer as CEO of Microsoft.
Microsoft will acquire both Nokia’s Lumia smartphone business and its low-end lines, such as the S40-powered Asha phones, which Microsoft plans to use as an “on-ramp to Windows Phone” in developing markets. That means besides flagship Windows Phones like the 41-megapixel Lumia 1020, Microsoft will be selling a good number of phones at price points cheaper than that of an Xbox wireless controller and running non-Microsoft OSes– interesting and unfamiliar terrain for the company.
Microsoft’s slide deck on the strategic rationale for the deal (also embedded below) gives a sense of the company’s approach: by licensing the Windows Phone OS to OEMs, Microsoft only makes about $10 per phone (plus revenue from its app store and other services); as both the OS and phone manufacturer, it would make over $40 per unit. That’s more like the margins Apple enjoys, but Microsoft would ideally like a combination of its own devices and OEM licensees, to cover as many market segments as possible– and therein lies perhaps the biggest motive for acquiring Nokia: the risk that someone else could snap up the device maker and jeopardize Microsoft’s presence in the mobile industry:
We will continue to support iPhone and Android/Galaxy phones with our services, but we cannot risk having Google or Apple foreclose app innovation, integration, distribution or economics.
Like the Skype acquisition in 2011, this deal will be financed using Microsoft’s overseas cash reserves, which helps the company avoid paying taxes to repatriate the cash to the United States. Perhaps more interestingly, the slides reveal that Microsoft aims to triple its mobile market share by 2018, hitting 15 percent globally.
Nokia will refocus on its remaining businesses: network infrastructure and services, mapping and location services, and technology development. Microsoft will license Nokia’s portfolio of 30,000 patents for use across all its products, for 10 years, with an option to extend perpetually. It will also license Nokia’s HERE mapping services for 4 years, for use on its own products and for its business customers via syndication on the Windows Azure cloud platform.
Branding is a potentially interesting point– Microsoft will own the Lumia and Asha brands, and will gain a 10-year license to use the Nokia brand on non-smartphones, suggesting a transition over to the Microsoft brand for smartphones. Nokia is also rumored to be entering the tablet market with a 10″ Windows RT offering this fall, which would mean that come 2014, Microsoft would have two first-party tablet lines in the 10″ space– Surface and the Nokia tablets.
By acquiring Nokia’s devices business, Microsoft is taking a big leap into the cutthroat world of mobile phones, with a degree of end-to-end vertical device and service integration unseen beyond Apple and Google. A close parallel is perhaps Motorola, which sold its consumer devices division to Google to enable the latter’s entry into the first-party smartphone space, but Nokia is a much more significant global phone player than Motorola was, has a more valuable patent portfolio, and in spaces like mapping services, competes with Google in its own right.
In a blog post, Microsoft EVP, Operating Systems, Terry Myerson, wrote that Microsoft will continue to collaborate with its other OEM partners for Windows Phone, such as HTC, Huawei, and Samsung, treating them in the same way it treats its own hardware teams. Microsoft will likely integrate some of Nokia’s customization, like its HERE Maps suite, into the core Windows Phone OS to bolster all OEMs on its platform. Myerson even cited a song lyric to allay any concern its OEM partners might have: “I don’t shine if you don’t shine.”
Will the Nokia acquisition help Microsoft finally beat back iOS and Android domination of the global smartphone market? Only time can tell, but a great deal rests on Microsoft’s ability to integrate its vertical stack of services into high-quality device offerings. Rapid execution will be key– and that’s something Nokia’s done a much better job of than Microsoft over the last two years in the smartphone space.
Read on after the break for Microsoft’s strategic rationale presentation and press release.
Microsoft to acquire Nokia’s devices & services business, license Nokia’s patents and mapping services
Sept. 03, 2013
REDMOND, Washington and ESPOO, Finland – Sept. 3, 2013 – Microsoft Corporation and Nokia Corporation today announced that the Boards of Directors for both companies have decided to enter into a transaction whereby Microsoft will purchase substantially all of Nokia’s Devices & Services business, license Nokia’s patents, and license and use Nokia’s mapping services.
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.
Building on the partnership with Nokia announced in February 2011 and the increasing success of Nokia’s Lumia smartphones, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing. For Nokia, this transaction is expected to be significantly accretive to earnings, strengthen its financial position, and provide a solid basis for future investment in its continuing businesses.
“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.”
“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 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.”
“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,” said Stephen Elop, who following today’s announcement is stepping aside as Nokia President and CEO to become Nokia Executive Vice President of Devices & Services. “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.”
Nokia has outlined its expected focus upon the closing of the transaction in a separate press release published today.
TERMS OF THE AGREEMENT
Under the terms of the agreement, Microsoft will acquire substantially all of Nokia’s Devices and Services business, including the Mobile Phones and Smart Devices business units as well as an industry-leading design team, operations including all Nokia Devices & Services-related production facilities, Devices & Services-related sales and marketing activities, and related support functions. 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.
Microsoft is acquiring Nokia’s Smart Devices business unit, including the Lumia brand and products. Lumia handsets have won numerous awards and 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.
Microsoft is also acquiring Nokia’s Mobile Phones business unit, which serves hundreds of millions of customers worldwide, and had sales of 53.7 million units in the second quarter of 2013. Microsoft will acquire the Asha brand and will license the Nokia brand for use with current Nokia mobile phone products. Nokia will continue to own and manage the Nokia brand. This element provides Microsoft with the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia’s mobile phones to serve as an on-ramp to Windows Phone.
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.
In addition, 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.
Microsoft also announced that it has selected Finland as the home for a new data center that will serve Microsoft consumers in Europe. The company said it 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.
NOKIA LEADERSHIP CHANGES
Nokia expects that Stephen Elop, Jo Harlow, Juha Putkiranta, Timo Toikkanen, and Chris Weber would transfer to Microsoft at the anticipated closing of the transaction. Nokia has outlined these changes in more detail in a separate release issued today.
EXTRAORDINARY SHAREHOLDERS MEETING
Nokia plans to hold an Extraordinary General Meeting on November 19, 2013. The notice of the meeting and more information on the transaction and its background are planned to be published later this month.
Nokia will host a press conference today, Tuesday, Sept. 3, at 11 a.m. EEST in Dipoli, Espoo (Otakaari 24). Registration will start at 10 a.m., and the doors will open at 10.40 a.m. Due to space constraints, only media who show valid press credentials at the registration will be admitted. Media are encouraged to watch a live webcast of the press conference at:http://press.nokia.com/
Microsoft will hold a conference call for investors, financial analysts and news media Tuesday, Sept. 3, at 3:45 p.m. EEST/8:45 a.m. EDT. Interested parties should call toll-free at (888) 459-9165, or for international calls dial +1-773-799-3324. You may also access the call online athttp://www.microsoft.com/investor.
Nokia executives will hold an investor call at 3 p.m. EEST today, Tuesday, Sept. 3. A webcast of the conference call will be available at http://investors.nokia.com. Media representatives can view the webcast or listen in at +1 706 634 5012, conference ID 45390451.
Rapid Response Team, Waggener Edstrom Worldwide, +1 (503) 443-7070,email@example.com