Microsoft's Acquisition of Nokia's Smartphone Business a Win-Win

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When Nokia (NYSE: NOK  ) made the decision in early July to buy the 50% of Nokia Siemens Network (NSN) it didn't already own, it was a sound move in and of itself, giving it full control of the driving force behind its revenues and earnings. How valuable is NSN? Last quarter, it was once again profitable, generated more revenue than Nokia's devices unit,, and added $1.85 billion to its net cash position.

With the announcement that Microsoft (NASDAQ: MSFT  ) will acquire Nokia's smartphone lineup for $7.2 billion, along with the use of Nokia smartphone-related patents for 10 years, both companies will fundamentally change. And considering Microsoft's desire to go mobile and Nokia's plan to focus on other, more profitable markets like telecom infrastructure provider NSN, this deal is right in line with both companies objectives.

The deal
The total value of Microsoft's acquisition of the device and services unit comes to $7.2 billion, which includes about $5 billion for Nokia's phone and ongoing operations, and the balance for non-exclusive rights to Nokia's phone-related patents. Microsoft has agreed to make about $2 billion available immediately in the form of three sets, or tranches, of convertible bonds issued by Nokia.

The plan is for Stephen Elop to step down from his CEO position and his seat on Nokia's board to take over as president of what will be Microsoft's device and services unit, and oversee the 32,000 former Nokia employees who will transition to the world of Microsoft. Considering Elop's background with Microsoft, Steve Ballmer's stepping down, and now this mammoth deal, let the "Elop Named Microsoft's New CEO" rumors begin.

The acquisition is expected to close early in 2014, assuming Nokia is able to gain shareholder approval at a special meeting scheduled for Nov. 19, 2013, and will be funded using about 10% of Microsoft's overseas cash hoard of $70 billion.

The bottom line
Leaving the smartphone device manufacturing business is a huge step for Nokia. For a company that was instrumental in the mobile phone manufacturing industry for so long, this deal changes who and what Nokia is.

But as tough as it may be to swallow for die-hard fans, the deal strengthens Nokia's balance sheet considerably and allows it to concentrate on NSN, mapping, and developing new technologies  -- historically, areas of strength for Nokia. Sure, Nokia stands to lose about $3.6 billion in quarterly revenues by selling its devices and services unit, but it won't miss the ongoing losses.

As with any deal of this magnitude, some analysts and pundits are saying Nokia sold its devices and services unit too cheaply. But adding $2 billion in value to its patent portfolio over the next 10 years is great for Nokia, as is ridding itself of an underperforming unit in a hypercompetitive market led by Apple's iPhone and Google's Android OS. That's a fight best left to others, like Microsoft.

As for Microsoft, $7.2 billion is hardly chicken feed, but it doesn't put a dent in its strong balance sheet. More importantly, the acquisition of Nokia's devices and services unit brings control of Microsoft's mobile expansion efforts in-house, making it easier to fully integrate its Windows Phone OS into mobile devices. That's right in line with Microsoft's objective to drive future growth by relying less on the declining PC market and more on expanding its mobile offerings.

Final thoughts
Deals of this magnitude, in which both parties fundamentally change the focus of their respective businesses, can be a bit scary for investors. There are a lot of "ifs" to consider.

But given Nokia's acquisition of the remaining 50% of NSN and its focus on its other products and services going forward, along with Microsoft's objective of growing its mobile footprint in part by better integrating Windows Phone, this deal accomplishes exactly what both companies needed, in one fell swoop.

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9/28/2016 4:00 PM
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