Microsoft buys Nokia’s phone business

Microsoft is buying Nokia’s cellphone handset business as part of a $7.2 billion deal, the two companies announced Monday.

The acquisition represents an aggressive move by Microsoft to compete in the smart-devices market, as the company transforms itself into a devices-and-services business.

“To accelerate our growth in the phone business, we thought it was important to move even faster,” Microsoft CEO Steve Ballmer said in a phone interview.

Microsoft is paying $5 billion for Nokia’s Devices and Services Business. In addition, it is paying about $2.18 billion to license Nokia’s patents and to license and use Nokia’s mapping services.

The businesses that Microsoft is getting from Nokia brought in about $19.7 billion revenue in 2012, about half of Nokia’s sales that year.

Nokia retains other substantial parts of its business, including networking infrastructure and services, technology development and licensing, and mapping and location services.

Microsoft and Nokia, both of which have struggled to compete against Apple and Google Android phones, have been close partners since Nokia announced in February 2011 that it was making Windows Phone its primary smartphone operating system. Its Lumia line of Windows Phone has been credited with Windows Phone’s gain over the past several months, even as the operating system struggles to build beyond its currently worldwide market share of about 3.3 percent

With the acquisition, instead of having to go through two companies for each innovation or marketing move, “we remove any boundaries in agility,” Ballmer said.

“We’ve been working very well together. But at the end of the day, we’re two companies that need to protect relative value for their shareholders,” Ballmer said.

Nokia CEO Stephen Elop is stepping down from that position and becoming executive vice president of Nokia’s Devices & Services division, leading its transition into Microsoft.

Once the transition is finalized, Elop becomes an executive vice president at Microsoft, heading a devices division that will include Windows Phone, as well as Xbox and Surface. Julie Larson-Green, who is now the executive vice president in charge of the Devices & Studios division at Microsoft, will report to Elop.

Before going to Nokia, Elop was president of Microsoft’s Business division, the unit that handles Microsoft Office and other products. His name has come up fairly frequently — and recently topped the list of at least one oddsmaker — as a possible successor to Ballmer, who announced last month that he would be retiring once his successor has been chosen within 12 months.

Ballmer said that this deal was about “accelerating our devices and services” strategy, rather than about CEO succession.

But he did say that he had informed Elop and Risto Siilasmaa, Nokia’s chairman and interim CEO, of his plans shortly before he made his retirement announcement, so they would know what they were getting into.

Microsoft’s board has a search process in place, Ballmer said.

With Elop’s move back to Microsoft, “Stephen will go from external [candidate] to internal,” Ballmer said. “The board will continue [to look at] all appropriate candidates through that process.”

In total, Microsoft is getting Nokia’s mobile, smartphone and smart-devices units; its design team; its production facilities; and its sales, marketing and support operations, according to Nokia.

Most of Nokia’s employees will remain where they are. After the deal closes, the roughly 32,000 employees in Nokia’s Devices & Services division — slightly more than half of them working in manufacturing and assembly in Nokia’s production facilities around the world — will still work in those facilities but will work for Microsoft. About 4,700 work in Finland in research and development, engineering, design and operations and will remain there.

Ballmer said he thinks the deal will create value for Microsoft shareholders that “can be fiscally accretive by fiscal year 2015.”

Nokia, which has been floundering and posted a $151 million loss last quarter, said it expects to gain about $4.2 billion on the sale.

Nokia Chairman Siilasmaa said the sale will provide a stronger balance sheet for Nokia as it focuses on building its remaining businesses.

Ballmer said Microsoft is acquiring a company with some operating losses but also great leverage in certain areas.

The Finnish company retains the Nokia brand and under a 10-year agreement, Microsoft has said it would use the Nokia brand on certain mobile phones based on its Series 30 and Series 40 operating systems.

However, Nokia is restricted from using its own name on its own mobile devices until Dec. 31, 2015.

Microsoft is using its overseas cash reserves to fund the cash purchase, which is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders and regulatory approval, according to a news release. Microsoft had reported having about $77 billion in cash reserves in a financial document filed with the U.S. Securities and Exchange Commission.

Such an acquisition “has been on everyone’s minds on and off,” Al Hilwa, an analyst with research firm IDC, said in an email. “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.”