Microsoft (NASDAQ: MSFT) and Nokia (NYSE: NOK) aren't purely internet companies, but they are of immense importance to the internet world with one being the largest software company and the other being the largest seller of mobile handsets. Microsoft today announced the acquisition of Nokia's devices business, its smartphone partner.
Under the new deal Microsoft will acquire the devices and services business of Nokia Corp, and will also acquire rights to license the patents and mapping services of Nokia, while Nokia will retain ownership of the patents. The deal has been approved by the boards of the two companies. Microsoft will pay $5 billion to acquire all of Nokia’s services and devices business and a further $2.17 billion to license Nokia’s patents for a total all cash transaction of $7.17 billion. The transaction is expected to close in the first quarter of 2014, subject to approval requirements. The acquired operations generated close to $19.65 billion revenues in the FY 2012, contributing nearly 50% of Nokia’s total revenues. As per company statements, the deal will enable Microsoft to accelerate the growth of its market share and profits in the mobile devices space. The transaction is also expected to be significantly accretive to the earnings of Nokia, thereby strengthening its financial position, and providing a solid basis for investments in its continuing businesses. While the Nokia Lumia phones have been selling more units with every passing quarter, the acquired division has suffered from decreasing margins and it will take a huge effort on part of Microsoft to make the acquisition profitable.
This acquisition leaves the mobile OS market to three companies namely Microsoft, Google and Apple. Microsoft will be getting access to the large number of low-end phones which Nokia has in its portfolio apart from windows OS phones. It is unclear how Microsoft will deal with the low margin low cost devices business of Nokia. Could this be the turnaround of Microsoft’s failed foray into devices through the Surface? The turnaround will largely depend on Microsoft’s ability to drive down costs in the acquired businesses in order to improve margins from the segment. The acquisition closely follows the announcement of Steve Ballmer’s retirement. Will the new leadership be able to turnaround the company with the stock having hit a plateau for close to a decade now? The new CEO will have his work cut out and hands full to restore Microsoft to the glory days it saw during the leadership of Bill Gates.
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