Microsoft Has Acquired Nokia

3 September 2013

Microsoft News Center:

Corporation and Nokia Corporation today announced that the Boards of Directors for both companies have decided to enter into a transaction whereby Microsoft will purchase substantially all of Nokia’s Devices & Services business, license Nokia’s patents, and license and use Nokia’s mapping services.

Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s Devices & Services business, and EUR 1.65 billion to license Nokia’s patents, for a total transaction price of EUR 5.44 billion in cash. Microsoft will draw upon its overseas cash resources to fund the transaction. The transaction is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders, regulatory approvals and other closing conditions.

The acquisition converts to about 7 billion dollars in value, but Nokia and Microsoft were already close partners. What benefits does Microsoft gain from turning an alliance into an acquisition?

Money incentives seems like a good place to start. With Nokia as a licensee, Microsoft earned $10 gross per phone sale. Estimates on Nokia’s average gross margin sit in the $40 range. This means Lumia sales will now bring in around $50 gross profit for Microsoft, rather than $10.

However, as Lumia sales make up the vast majority of the Windows Phone portfolio anyway, effectively Microsoft is increasing the returns on Windows Phone overall by five times because of the acquisition.

Looking at the buyout terms more closely, Microsoft will pay about $2 billion just for Nokia’s intellectual property. Although the rate of high-profile patent disputes seems to have died down, expanding your patent portfolio tends to be cost-effective.1 Nokia’s design patents will probably assist in Microsoft’s plans for a Surface Phone as well. When looking at the “$7 billion dollar acquisition” headlines, it is important to remember that a third of that cost is in intellectual property.

In terms of future outlook, I think the Nokia acquisition only pays for itself if the incorporation into Microsoft’s monstrous corporate structure is handled well. With Nokia already a primary partner, deep integration of Nokia’s talent1 into Microsoft is required to make the purchase make financial sense. Annexing Nokia, in a similar vein to how Google has handled Motorola, would be a waste of resources; it would offer no additional benefit over the close partnership the two companies already had.

Finally, did $5 billion dollars just get Microsoft a competent CEO? That is the big question. This is currently all speculation and no fact, but the proximate timing of Ballmer’s departure and the buyout is hard to accept as as a coincidence.

1 Admittedly, Google’s purchase of Motorola’s intellectual property looks like it has been a complete failure.

2 Microsoft gains 32,000 of Nokia employees in the acquisition.