Nokia's Lumia smartphone, which runs Windows Phone 8. Photo: Reuters
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Microsoft will buy Nokia's phone business and license its patents for 5.44 billion euros ($8 billion), making its boldest foray yet into mobile devices and bringing executive Stephen Elop back into the fold.
The deal changes the nature of both companies. Nokia is exiting from the mobile-phone business it once dominated, leaving it mainly as a wireless-network equipment maker. Microsoft, which became the world’s largest software maker on the back of its Windows operating system, is moving aggressively into hardware.
Nokia chief Mr Elop, a former Microsoft executive, will return as Microsoft's board ponders a successor to current CEO Steve Ballmer, who will depart sometime in the next 12 months after initiating a reorganisation intended to transform the software company into a devices and services group in the mould of Apple.
The sale of Nokia's phone business marks the exit of a 150-year-old company that once dominated the global mobile phone market and remains one of Europe's premier technology brands, even though Apple and Samsung Electronics' ascendancy all but reduced it to irrelevancy in Asia and North America in recent years.
"For a lot of us Finns, including myself, Nokia phones are part of what we grew up with. Many first reactions to the deal will be emotional," said Alexander Stubb, Finland's minister for European Affairs and Foreign Trade, on his Twitter account.
Microsoft reinventing itself
With the deal, Microsoft becomes the last major developer of smartphone operating systems to get into the manufacturing business.
Apple makes its own handsets, which use its iOS operating system. Google acquired Motorola Mobility last year for about $US12.4 billion, giving the company its own lineup of phones.
Yet the deal also raises questions as to whether Microsoft and Nokia will prop each other up or weigh each other down.
Microsoft’s other recent significant move into hardware, the Surface tablet, sold below expectations so that it had to take a charge to write down inventory last quarter.
'Fire sale' of phone business
The sale price of the phone business, at about one-quarter of its sales last year, represented a "fire sale level", according to analyst Tero Kuittinen at consultancy Alekstra, although others disagreed on pricing.
"What should be paid for declining business, where market share has been constantly lost and profitability has been poor?" said Hannu Rauhala, an analyst at Pohjola Bank. "It is difficult to say if its cheap or expensive."
Nokia - reduced to its networks business, navigation offerings and patent portfolio after the sale - is still the world's No. 2 mobile phone maker behind Samsung, according to the latest figures, but it is not in the top five in the more lucrative and faster-growing smartphone market.
Sales of Nokia's Lumia series have helped the market share of Windows Phones in the global smartphone market climb to 3.3 per cent, according to consultancy Gartner, overtaking ailing BlackBerry for the first time this year. Still, Google's Android and Apple's iOS system make up 90 per cent of the market.
'Bold step into the future'
"It's a bold step into the future - a win-win for employees, shareholders and consumers of both companies," Microsoft's outgoing CEO, Steve Ballmer, said in a statement.
"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."
The companies did not say in which role Mr Elop will return to Microsoft, but the Canadian, who was hired by Nokia in 2010 from Microsoft, has been tipped as the favourite to succeed Mr Ballmer when the Microsoft chief steps down next year.
Nokia is coping with cash-flow challenges stemming from weaker demand as its phones lose share to devices from Apple and handsets using Google’s Android operating system.
‘‘Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that,’’ said Paul Budde, a Sydney-based telecommunications consultant. ‘‘The question is whether combining two weak companies will get you a strong new competitor. It’s doubtful.’’
Microsoft gets 32,000 new staff
Under the terms of the agreement, Microsoft will take over all of Nokia’s devices and services business, including the mobile phones and smart devices business units.
About 32,000 staff are expected to transfer to Microsoft, including 4700 people in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide, the companies said.
As part of the deal, Microsoft will also take over the Lumia brand and products. Nokia’s mobile phones business unit serves hundreds of millions of customers worldwide and had sales of 53.7 million units in the second quarter of 2013.
The operations that are planned to be transferred to Microsoft generated an estimated 14.9 billion euros, or almost 50 per cent of Nokia’s net sales for the full year 2012.
Mr Elop has cut more than 20,000 jobs and suspended the company’s dividend in January in an attempt to improve its finances.
Siilasmaa 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,’’ chairman Risto Siilasmaa said in a statement.
Mr Siilasmaa will become interim CEO of Nokia.
After the sale to Microsoft, Nokia’s biggest business will be its unit selling wireless-network equipment to mobile-phone carriers, called Nokia Solutions and Networks.
The unit has struggled amid intensifying competition from Sweden’s Ericsson AB and China’s Huawei Technologies Co. and ZTE Corp. The NSN division started a program in late 2011 to cut 17,000 jobs, or about 23 per cent of its total.
Nokia said it will also keep its mapping and location services business, called Here, and its technology development and licensing division.
Microsoft and Nokia have had a close relationship through Mr Elop, who had run Microsoft’s Office unit. He left the software maker in September 2010 to take the top job at Nokia.
At the time, Mr Elop likened his company’s mobile position to a man standing on a burning oil platform on the verge of being engulfed in flames, facing the option of staying aboard or jumping to the ocean to have a chance to survive.
In February 2011, Mr Elop struck a deal with Mr Ballmer to switch Nokia’s smartphones from its own Symbian operating system to Windows Phone. In exchange, Microsoft ponied up more than $US1 billion dollars to pay for Nokia marketing and developing products on Windows.
Yet Nokia has lost more than 5 billion euros in nine quarters as Elop’s comeback bid hasn’t reversed market-share declines. Nokia’s basic phones are losing users to Chinese rivals and new smartphones have failed to stop shoppers from picking up Samsung and Apple devices.