Microsoft CEO Steve
Ballmer speaks during a press conference on the company's deal with
Finnish mobile manufacturer Nokia in Espoo, Finland on Tuesday, Sept. 3,
2013. Microsoft Corp. is buying Nokia Corp.'s line-up of smartphones
and a portfolio of patents and services in an attempt to mount a more
formidable challenge to Apple Inc. and Google Inc. as more technological
tasks get done on mobile devices instead of personal computers. (AP
Photo/Lehtikuva, Markku Ulander)
Microsoft is wagering
$7.2 billion on the idea that owning Nokia's phone business will help
the software giant grab a bigger slice of the mobile computing market
from Apple and Google
The Windows maker is
buying Nokia Corp.'s line-up of smartphones and a portfolio of patents
and services. The 5.44 billion euros ($7.2 billion) deal, announced late
Monday, marks a major step in the company's push to transform itself
from a software maker focused on desktop and laptop computers into a more versatile and nimble company that delivers services on any kind of Internet-connected gadget.
But some analysts questioned whether buying up the mobile business of
Nokia, the fading star of the cellphone world, would aid Microsoft.
"Until there are signs that (Microsoft) can innovate and successfully
execute in the post-PC era, we expect the stock to languish at current
levels," said Janney analysts Yun Kim and Alice Hur. "We do not believe
the planned acquisition of (Nokia's) mobile business changes
(Microsoft's) strategic positioning in the smartphone market."
Microsoft's shares fell $2.05, or 6.1 percent, to $31.35 in midday trading in the U.S.
Microsoft, based in Redmond, Wash., has been racing to catch up with
customers who are increasingly pursuing their digital lives on
smartphones and tablet computers rather than traditional PCs. The shift is weakening Microsoft, which has dominated the PC software market
for the past 30 years, and empowering Apple Inc., the maker of the
trend-setting iPhone and iPad, and Google Inc., which gives away the
world's most popular mobile operating system, Android.
Microsoft is now betting it will have a better chance of narrowing
the gap with its rivals if it seizes complete control over how mobile
devices work with its Windows software.
"It's a bold step into the future—a win-win for employees,
shareholders and consumers of both companies," Microsoft CEO Steven
Ballmer told reporters at Nokia's headquarters in Finland Tuesday.
"It's a signature event."
But speaking to investors and analysts later Tuesday, Ballmer
admitted that the company still has to play catch-up with the likes of
Apple and Android.
"We know we need to accelerate. We're not confused about that," he said.
Standing together are
from left to right, Nokia's new CEO Timo Ihamuotila, Chairman of the
Board Risto Siilasmaa and former Nokia CEO Stephen Elop, during the
press conference of the Finnish mobile manufacturer Nokia in Espoo,
Finland on Tuesday, Sept. 3, 2013. Microsoft has announced a takeover of
the Finnish mobile phone company Nokia in a deal reported to be worth
some 5.44 billion euros (US dlrs 7.2 billion). (AP Photo / LEHTIKUVA,
Markku Ulander)
"We need to be a company that provides a family of devices."
Nokia, based in Espoo, near the Finnish capital, and Microsoft have
been trying to make inroads in the smartphone market as part of a
partnership forged in 2011. Under the alliance, Nokia's Lumia
smartphones have run on Microsoft's Windows software, but those devices
haven't managed to compete with iPhone or the array of Android-powered
devices spearheaded by Samsung Electronics' smartphones and tablets
Terry Myerson, Microsoft Executive Vice-President of Operating
Systems, admitted on a call to investors Tuesday that the message about
company's products hasn't been getting through to consumers and that
"marketing approaches we've used in the past have been inefficient."
The acquisition is being made at the same time that Microsoft is
looking for a new leader. Just 10 days ago, Ballmer, 57, announced he
will step down as CEO within the next year.
Stephen Elop, who left Microsoft in 2010 to become Nokia CEO, will
step down as president and CEO of the company to become executive vice
president of Nokia devices and services and will rejoin Microsoft once
the acquisition closes.
The deal has fueled speculation that Elop, a former Microsoft executive, will emerge as a top candidate to succeed Ballmer.
Nokia board chairman Risto Siilasmaa told reporters that they had
been preparing the deal since February. "It's been an extremely
pragmatic and deeply analytical process where we have left no stone
unturned to understand all the possible alternatives for the company
going forward," said Siilasmaa, who will be Nokia's interim CEO.
Investors in Nokia welcomed the deal, sending shares in the company up 34 percent to 3.97 euros in Helsinki.
Microsoft hopes to complete the deal early next year. If that
timetable pans out, about 32,000 Nokia employees will transfer to
Microsoft, which currently has about 99,000 workers.
The proposed price consists of 3.79 billion euros ($5 billion) for
the Nokia unit that makes mobile phones, including its line of Lumia
smartphones that run Windows Phone software. Another 1.65 billion euros
($2.2 billion) will be paid for a 10-year license to use Nokia's
patents, with the option to extend it indefinitely. Ballmer said that
Microsoft will invest more than $250 million in a new data center to
serve European consumers.
Nokia CFO Timo Ihamuotila said the company's future will center on
its mobile networks business and two smaller units—HERE mapping services
and the advanced technologies unit including Nokia's licensing
business.
"Our aim is clearly to grow the networks business in a profitable
way," he said in a call to investors. "It is a cash-generating business
where we can invest into the future growth."
Nokia will continue to own the rights to its brand, but the deal
between the two companies prevents it from venturing into a separate
smartphone business until the end of 2015.
Neil Mawston from Strategy Analytics said the move was good for
Nokia's shareholders but did not change much for the ailing Finnish
firm, which has lost significant market share.
"Nokia is still heavily dependent on Microsoft's software
capabilities and Microsoft continues to lag the market like it has done
in the last few years," Mawston said. "Not much will change whether
Nokia is inside or outside the Microsoft portfolio."
The deal with Nokia represents the second most expensive acquisition
in Microsoft's 38-year history, ranking behind an $8.5 billion purchase
of Internet calling and video conferencing service Skype. Tony Bates,
who ran Skype, is also regarded as a potential successor to Ballmer.
The money to buy Nokia's smartphones and patents will be drawn from
the nearly $70 billion that Microsoft held in overseas accounts as of
June 30.
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