Microsoft to acquire Nokia's phone business for $7.2B

Microsoft (NASDAQ:MSFT) announced it will pay around $7.2 billion for Nokia's (NYSE:NOK) mobile phones business and a license to its patents and mapping software. Under the agreement, Microsoft will acquire around a third of Nokia's roughly 88,000 employees and much of its Lumia smartphone and Asha feature phone business.

The companies expect the deal to close in the first quarter of next year.

The transaction will give Microsoft the ability to move more quickly in the mobile phone business. To date the company has worked to license its Windows Phone smartphone operating system to manufacturing companies like Nokia, HTC and Samsung Electronics. However, Microsoft's purchase of Nokia's phone business will allow it to control both the hardware and software elements of Windows Phone. Further, Nokia already sells the vast majority of Windows Phones.

Interestingly, Microsoft said it will continue to license out its Windows Phone OS to other manufacturers, at least those willing to pay for it. "Today's announcement doesn't change that--acquiring Nokia's Devices group will help make the market for all Windows Phones, from Microsoft or our OEM partners," wrote Microsoft's Terry Myerson, the company's executive vice president of operating systems, in a blog post.

Indeed, Microsoft's purchase of Nokia is essentially an expansion of its previously announced plans to get into the hardware business, highlighted by the company's Surface line of tablet computers. Microsoft is also following the lead of Google (NASDAQ:GOOG), which in 2011 acquired Motorola's mobile phone business for around $12.5 billion.

But Microsoft has a long hill to climb. Consumers across the globe purchased 7.4 million Windows Phone devices in the second quarter, up from 4 million in the year-ago period and corresponding to 3.3 percent global smartphone market share, Gartner said. That figure is way below Android's 79 percent of the market and iOS' 14.2 percent.

There are a number of complex elements to Microsoft's transaction with Nokia. First, Microsoft will acquire "substantially all" of Nokia's Devices & Services business for around $5 billion, including Nokia's Lumia smartphones and its feature phones. Microsoft explained that it will use Nokia's low-end feature phone business 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."

The operations that are planned to be transferred to Microsoft generated an estimated $19.6 billion, or almost 50 percent, of Nokia's net sales for the full year 2012. According to ABI Research, Nokia was the world's second largest mobile phone manufacturer in the second quarter.

Microsoft will also pay $2.1 billion for a 10 year non-exclusive license to Nokia's patent portfolio. Separately, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm (NASDAQ:QCOM).

Microsoft will also gain 32,000 of Nokia's roughly 88,000 employees, including 4,700 people in Finland and 18,300 employees in phone manufacturing and assembly. Nokia CEO Stephen Elop, along with key Nokia executives like Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber, are expected to transfer to Microsoft. Risto Siilasmaa, chairman of the Nokia board of directors, will take over as Nokia's interim CEO. Elop resigned as CEO to avoid conflicts of interest.

Microsoft CEO Steve Ballmer recently announced he will retire from the company within the next 12 months, and Nokia's Elop has been discussed as a possible replacement.

So where does this all leave Nokia, which was just a few short years ago the world's largest mobile phone manufacturer? The company said it will move forward with three specific businesses: Nokia Solutions and Networks, which provides network equipment to carriers; HERE, which sells mapping and location services; and the new Advanced Technologies, which Nokia said "will explore new business opportunities through advanced research, development and concept products in areas such as connectivity, sensing and material technologies, as well as web and cloud technologies." Nokia also said Advanced Technologies will handle the company's patent portfolio.

Although the Wall Street Journal reported in June that Microsoft and Nokia had held discussions about Nokia's phone business, the news still took most industry watchers by surprise. Immediate reaction was decidedly mixed.

"Microsoft has been struggling with Windows Mobile / Phone as a horizontal platform for over 15 years. Nokia is a big but necessary gamble," Tweeted CCS Insight analyst Geoff Blaber.

For more:
- see this Microsoft release
- see this Nokia release
- see this WSJ article (sub req.)

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Article updated Sept. 3 to correct information about Microsoft's licensing of Qualcomm's patents and Nokia's employee count.