Microsoft Looks To Scale Up Mobile with $7.18 Billion Nokia Buyout

• By Jeffrey Schwartz
• 09/03/13

Microsoft will acquire Nokia's devices and services business for $7.18 billion in cash.

The deal, announced early Tuesday morning in Espoo, Finland, where Nokia is based, is Microsoft's second-largest, rivaled only by the 2011 acquisition of Skype for $8.5 billion, and puts an even larger bet on its expansion into hardware. The company's third-largest acquisition was aQuantive for $6 billion, which Microsoft wrote off last year.

From a scale perspective, the deal is huge. When the deal closes in the first quarter of 2014, an estimated 32,000 Nokia employees will transfer to Microsoft, including 4,700 in Finland and 18,300 involved in manufacturing, assembly and packaging of products worldwide, the companies announced.

Terms of today's agreement, approved by both companies' boards, covers the acquisition of all Nokia's devices and services business, the licensing of Nokia's patents and of its mapping services.

Such a deal seemed all but dead back in June when the two companies were reportedly in advanced discussions before talks broke down and it appeared unlikely the companies would renew negotiations.

That the two companies had consummated a deal is surprising considering there were no reports they had resumed negotiations. The timing is even more unexpected considering less than two weeks ago Microsoft announced CEO Steve Ballmer will retire within the next 12 months.

Ironically one of numerous candidates to succeed Ballmer is Stephen Elop, Nokia's CEO, who under the terms of today's agreement will return to Microsoft as an executive vice president.

"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," Elop said in a statement announcing the deal. "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."

Speculation that Microsoft might one day acquire all or part of Nokia had surfaced back in 2011 when the handset maker chose Microsoft's Windows Phone as its smartphone operating system of choice.  But such a deal had remained remote even though both companies have struggled to gain share over the much more dominant phone and tablet platforms iOS from Apple and Google's Android.

Microsoft is presumably hoping that adding Nokia's handset business and related software to its arsenal will give it the scale to expand the Windows Phone platform. Given reports that Nokia is also developing a Windows RT-based tablet, Microsoft may also be betting that the Nokia deal will help bolster its fortunes with its own struggling efforts to  gain share with its Surface tablet line. Microsoft's first crop of Surface devices have been a disappointment — the company in July took a $900 million charge on unsold inventory.

Even though the Nokia deal and Microsoft's bigger push into hardware may put the company at further odds with its PC and phone partners, Microsoft may be betting that just as Google has leveraged its acquisition of Motorola, Microsoft can do the same with Nokia using it to bolster its manufacturing capability and leverage Nokia's relationships with wireless carriers.

"It's a bold step into the future — a win-win for employees, shareholders and consumers of both companies," 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. 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."