Microsoft closes the purchase of Nokia: numbers

This week finally closes what was one of last year's news: the acquisition of Nokia's devices and services division by MicrosoftMore than seven months of a long process that has required the approval of the companies' shareholders and the approval of the regulatory authorities of the different territories, now culminates with the closing of an operation for which the best known party from Nokia Oyj becomes part of Microsoft Mobile Oy.

The news inaugurates a new stage in the Windows universe as it has not been seen for a long time.Microsoft has acquired an icon of mobile telephony and the manufacturer responsible for 93.5% of Windows Phone smartphones on the market. The importance of the agreement, its figures, how it came to be forged, names and consequences well deserve a final review before the next battle of this technological war begins.

The numbers and summary of the acquisition

The deal can be summed up in one short sentence: Microsoft has bought Nokia's mobile phone business; but the details of the operation and its implications go much further. Starting with the numbers and conditions of the purchase, which can be collected at the following points:

• For 3.79 billion euros Microsoft acquires Nokia's Devices and Services division, including 8,500 patents.
• For 1,650 million euros more, it manages to license the rest of the patents that Nokia will retain and the HERE map service for use in all its products.
• Microsoft also acquires the Lumia and Asha brands and license to use the Nokia brand in “feature phones” for the next 10 years.
• Nokia maintains the mapping service, the Siemens Networks division and the bulk of its valuable patent portfolio.
• 25 thousand Nokia employees will join the ranks of Microsoft. Many of them are directly related to the design and manufacture of mobile phones.

Microsoft's total outlay thus amounts to 5,440 million euros A figure that sounds like little for what the purchase of the former absolute dominator of mobile telephony. The Redmond company has acquired a history in the mobile phone industry and a manufacturer of reputable prestige and quality at a considerably low price. Even more so if we take into account recent purchases by other companies in the technology sector.

The situation left fertile ground for theories about Microsoft's strategy with Nokia and the role of Stephen Elop to reappear. The Canadian executive had changed the Redmond offices for his office in Espoo and many wanted to see him as a Trojan horse determined to blow up Nokia's growth and enable a cheap acquisition by Microsoft. There will be those who believe that time has proved them right, turning the agreement into the master move of a Steve Ballmer in the final stretch of his term, but the truth is that the history of the agreement seems much more mundane and far from Machiavellian maneuvers of some managers.

The story behind the agreement

Despite the appeal of the conspiracy arguments surrounding the role of Stephen Elop as CEO of Nokia there does not seem to be enough evidence to prove such a theory. Elop was the CEO of Nokia since September 2010 because his board of directors with Risto Siilasmaa at the helm allowed it.The same Siilasmaa whose conversations with Ballmer led to the sale operation that ends today. Operation that also received the approval of the shareholders in an extraordinary meeting held on November 19, 2013.

Risto Siilasmaa, Steve Ballmer and Stephen Elop

Microsoft and Nokia had been collaborating for some time Both companies signed an agreement in February 2011 whereby the Finnish company committed to using Windows Phone in its next smartphones and abandoned its claims to create its own operating system for its mobiles. In return, Microsoft would favor the transition with periodic investments and all kinds of facilities and privileges for access to system development.

Thus the agreement was maintained until two years later, at the Mobile World Congress in Barcelona in February 2013, Risto Siilasmaa and Steve Ballmer began to meet under the premise of finding better forms of collaboration.The two executives considered many future scenarios but ended up coming to the conclusion that only one combination could make sense for both companies: the sale of Nokia's device division to Microsoft.

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Steve Ballmer: We looked at many, many possibilities together and finally chose this one where we buy the entire Nokia phone business, we we became HERE partners and customers and licensed Nokia patents.> Thus came the summer of 2013, by which time another fundamental change was brewing at the Redmond offices. Under pressure from the board of directors and shareholders, Ballmer announced in late August his intention to step down as Microsoft CEO and gave the board 12 months to find a replacement. Ballmer&39;s withdrawal thus attracted the attention of the press and the public days before Microsoft announced the purchase of Nokia and the closeness between the two dates would serve to feed other rumors about the reasons for the operation."

Ballmer's relations with the board of directors hit an all time low when the executive raised his tone in a June meeting at Microsoft headquarters in Redmond.Ballmer was proposing the purchase of Nokiaand defended the need to do things his way in order to continue as CEO. Several board members, including Bill Gates, were opposed to a move that would turn Microsoft into a mobile phone maker and take it one step closer to turning it into a hardware company as well.

The operation under discussion

In the summer of 2013 Steve Ballmer defended the purchase of Nokia in front of a board of directors that did not seem convinced of the movement. Bill Gates never became a supporter of the operation and Satya Nadella initially disagreed with him.John Thompson, the chairman of the board, had to deal with a situation that would affect Ballmer's future as CEO.

The doubts were obvious within Microsoft. The ownSatya Nadella did not initially support the purchase eitherThe one who would end up being elected CEO of Microsoft showed his disagreement in an internal poll carried out in Redmond to verify executives' reaction to the deal. Over time, however, Nadella seems to have changed her mind:

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Satya Nadella: Nokia brings mobile through hardware, software, design, global supply chain expertise and a deep knowledge and connections about the mobile market. > The point is that the debate in Redmond was anything but calm. Sources with knowledge of the conversations say Ballmer&39;s yelling at the June meeting could be heard outside the conference room. The former CEO failed to convince the board at the time and had to wait three months to get a good part of what he wanted.Of course, at a very high cost for him."

On September 3, 2013, eleven days after Steve Ballmer announced his departure, Microsoft announced the purchase of Nokia The company de Redmond acquired Nokia's most publicly known businesses and some of its intellectual property, as well as obtaining multi-year service licenses and patents from the Finns. The acquisition should close in the first quarter of 2014, but after several delays, it has been necessary to wait until today to conclude an operation that opens a new phase for the two companies.

Nokia and the need to sell

In mid-2013 Nokia was still struggling to gain relevance in a market from which it had been driven out after years of dominance. Despite the agreement with Microsoft on Windows Phone and managing to reduce losses under the mandate of Stephen Elop, after laying off 40,000 employees and selling properties; the Finnish company was not managing to recover positions at the necessary pace and saw its competitors further and further away.

The following months also appeared seasick. Just before announcing its sale to Microsoft, several analysts pointed to a possible disastrous third quarter of 2013 for Nokia. If confirmed, it would add to the losses of 500 million euros that it already accumulated in the first six months of the year. The numbers were a significant reduction from the $1.8 billion loss in the same period of 2012, but not enough to help Nokia recover.

Since 2007, when Nokia shares peaked at $40.59, the company had left more than 80% of its value on the stock marketThe last movements had failed to stop the fall. In the third quarter of 2010 Nokia had a market capitalization of 90 billion, at the time of its sale to Microsoft that amount had dropped to 18 billion dollars.

Nokia stock since September 2007

And the worst thing was that the situation had no sign of changing in the near future. Nokia had completely lost its position in the important smartphone market and was unable to recover. If in 2007 its share of that market was 49.4%, in September 2013 it moved in figures of less than 4%. Lumia's sales, with 7.4 million smartphones in the second quarter of 2013, were not enough to scratch points from other manufacturers.

Siilasmaa himself acknowledged in September that Nokia did not have the resources to face the iOS and Android duopoly on its own Help from Microsoft wasn't enough, and the company was losing money on the current deal. Unable to stop the bleeding, Nokia could consider a turn in its strategy and try selling mobile phones with its own variant of Android.Something that, by the way, he would end up doing in his own way with the Nokia X.

With the numbers far from adding up and despair spreading in Nokia, the sale of part of the company began to make sense

With the numbers still far from adding up and despair spreading in the Espoo offices, the sale of part of the company to Microsoft began to make sense. Elop's strategy did not seem to have taken effect fast enough and Nokia was at a critical point from which it might not be able to get out alone. Selling its least profitable divisions, for all the history behind them, seemed like a necessary deal to avoid dragging the entire company to suicide.

To some Nokia may have sold its mobile division cheap but the truth is that the deal is a smart move for the company. The brand will continue to exist under the helm of those from Espoo, who will keep with them still profitable divisions and important intellectual property.In addition, part of the agreement includes 1,500 million euros in direct financing that Microsoft will provide in three payments of 500 million euros, allowing some relief to face the reconversion.

The markets also seem to think that the operation was appropriate. After months trading below $4, Nokia shares jumped 35% after the deal and have been trading above $7 for months. If anyone needed this deal it was Nokia

Microsoft and the need to buy

A device and service company. That is the mantra that Microsoft has been defending for months and that is one of the variables to explain why it bought Nokia. The other variable is the definitive recognition of the extreme importance of the mobile market. A market in which they were among the first to enter but in which they did not know how to respond at its moment of true explosion.If Microsoft wants to be a device and services company and be relevant in the mobile market an aggressive move like this was necessary

While Windows Phone is growing in market share, its pace is extremely slow. It barely exceeds a 10% share in a handful of countries and remains the third discordant system in a sector clearly dominated by Android and, to a lesser extent, iOS. Little joke to those in Redmond, where they believe that success on smartphones is essential for success on tablets and will help in a PC market that has been slowing down for some time.

The idea of ​​retaining its role as a software company would mean ceding control of the platforms to other players and would place them in a situation of weakness compared to their rivals. From Redmond they could well develop software for Android and iOS, as they already do, but they cannot run the risk of Google and Apple excluding them from innovation, integration or distribution of the mobile market Not to mention the strategic and economic consequences of depending on the platform of others.

As it stands, the acquisition was defended by Ballmer and company as a necessary step to protect the future of Windows Phone The move would provide the possibility of having your own hardware without limiting the participation of other partners in the system. Those at least were their stated goals. And it is that nobody escapes that Nokia is the only relevant manufacturer of the system and the possibility that it chose to try with others was too dangerous a threat.

Microsoft couldn't risk losing the company that at the time had more than 80% of the Windows Phone market.

For several months, many media considered the rumors of a possible Nokia terminal with Android. According to several Wall Street analysts, the real reasons for buying Nokia were hidden in that possibility.In Redmond they feared that the Finnish company would consider stopping manufacturing Windows Phone and breaking the agreement that bound them. A potential disaster for Microsoft that could not risk losing the company that at that time had more than 80% of the Windows Phone market.

For Steve Ballmer, the purchase of Nokia was imperative for the future of the company. And, right or wrong, he had the numbers to back it up. 5,440 million dollars is a low price if those of Redmond manage to reach the numbers estimated by the management: reach 15% of the market in 2018, with projected revenues by then of 45 billion dollars and with profits of between 2,300 and 4,500 million annually.

The bills could come out to those from Redmond. Windows Phone provided less than $10 per unit sold to Redmond, and after the acquisition that figure will exceed $40. Microsoft also acquires an exceptional mobile manufacturer. which is still the second largest thanks to its “feature phones”. Nokia still had a golden opportunity to capture users among the people who have not yet entered the smartphone market. That less established sector may be the best for the growth that Windows Phone needs.

A Necessary Agreement

Okia no longer had the resources to take on the iOS and Android duopoly, and Microsoft needed the manufacturer to ensure independence in the mobile market. The operation became a necessity for both companies.

With the deal Microsoft also acquires more than 8,500 patents and license agreements over as many which will remain in Nokia's portfolio. Together they add up to valuable intellectual property and put the Redmonds in a better position to charge third parties for the use of patents on smart devices.Something that it has already been doing with a large number of Android mobile manufacturers and that apparently provides not huge benefits.

The purchasing possibilities for Microsoft don't end there. The North American company has also has secured the map service HERE This will remain in the hands of Nokia but Microsoft will maintain its license and have preferential access to it and its technology. A fundamental step that recognizes the importance of this type of service and aims to avoid another possible focus of dependence on actors such as Google and its ubiquitous maps.

Microsoft has bought Nokia to ensure its independence in the mobile market

In Redmond they don't want to depend on anyone. Getting hold of Nokia devices and services now seems like a necessary step. If the operation manages to ensure their independence in the mobile market, the price of 5,440 million euros will not be much less expensive.The market and the users now have the word Only they and their decisions in the future will dictate the judgment on the last great act of Steve Ballmer as CEO of Microsoft.

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