Microsoft Acquisition of Nokia: An Analysis from Strategic and Financial Perspective
”We are excited and honored to be bringing Nokia’s incredible people, technologies and assets into our Microsoft family. Given our long partnership with Nokia and the many key Nokia leaders that are joining Microsoft, we anticipate a smooth transition and great execution. With ongoing share growth and the synergies across marketing, branding and advertising, we expect this acquisition to be accretive to our adjusted earnings per share starting in FY15, and we see significant long-term revenue and profit opportunities for our shareholders.”
– Steve Ballmer, Microsoft’s CEO
“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, 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.”
– Stephen Elop, Nokia’s CEO
“Microsoft will record a charge in the fourth quarter of fiscal 2015 for the impairment of assets and goodwill in its Phone Hardware segment, related to the Nokia Devices and Service business.”
– Steve Ballmer, Microsoft’s CEO
On 3rd September 2013, Microsoft Corporation (NASDAQ:MSFT) and Nokia Corporation (HEL:NOKIA) entered into a joint venture (JV), whereby Microsoft Corporation (Microsoft) acquired all of the Device and Service business of Nokia Corporation (Nokia) through an all-cash deal. The Microsoft-Nokia JV was the 2nd largest merger in the history of Microsoft after the acquisition of Skype Technologies, the VOIP innovators, for $9.2 billion...................
An Overview of Nokia
The Finnish company “Nokia” began its operation in 1865 as a single paper mill at Tammerkoski Rapids in south-western Finland. Over the years, Nokia has nurtured success in several sectors including paper products, rubber boots and tiers, cable, mobile devices and telecommunications infrastructure equipment. Nokia
entered the Device and Telecommunication industry with the motto of “connecting people” through its cutting edge technology. As early as 1980, Nokia became a household name around the world with the launch of Nordic Mobile Telephone (NMT), world’s first international cellular network with international roaming supported. The Nokia brand emerged as an undisputed leader in the mobile phone industry due the reliability, easy usage, higher resale value and durability of the devices.............
Insights into Nokia
Nokia was one of the largest manufacturers of mobile phones with world-acclaimed strategy and brand name. Nokia invested almost 14% of its revenue in Research and Development as a fundamental component of competitive advantage and sustainability. However, the company’s landscape began to change gradually post-2008. Nokia’s premier product lines were based on “Symbian”, an Operating System (OS) which was considered obsolete as compared to the modern counterparts such as iPhone OS (iOS) and Android. Apart from the technical limitations, Symbian OS prevented people or companies unrelated to the mobile manufacturing...........
An Overview of Microsoft
Microsoft is the world’s leading producer of computer software and is considered to be one of the most valuable brands in the world by Forbes magazine. Microsoft was incorporated in 1981, but it came into existence in 1975 when founder Bill Gates and Paul Allen saw an opportunity in operating system after the launch of Altair 8800 (microcomputer) by an American electronics company known as Micro Instrumentation Telemetry Systems (MITS)..............
Insight into Microsoft
Microsoft is a unicorn in the office productivity software and desktop operating system. The Windows OS itself has a total market share of about 88%, which includes Windows XP/Vista/7/8 and 10. This shows how predominant Microsoft is. Microsoft has become a household name across nations. Its brand awareness is extremely high..............
Global Smartphone Market
According to Gartner, the year 2013 saw a record sale of smartphones, 968 million units were sold, a whopping 42.3% increase from 2012 (Exhibit II). The smartphone market was rising exponentially and every player wanted a piece of this cake. Many new Chinese players emerged in the market..........
Rationale of the deal
Microsoft acquisition of a part of Nokia’s business was a strategic alliance where both the companies would work strategically to achieve common goals. Microsoft had nil to limited experience in manufacturing physical smartphone and needed strong.........
Strategic expectations of Microsoft
What was the rationale behind Microsoft buying out Nokia’s handset and service division?
• Improving market share: Microsoft believed that the acquisition will help them accelerate its market share and profits in the phone market as millions of new users were waiting to buy a new smartphone. Before the acquisition, Nokia and Windows phone had more than 10% share in 9 markets and it was outselling Blackberry (then, a very popular company) in 34 different markets. Lumia phones had started gaining popularity and it believed that the imaging capabilities of Nokia could drive more success to them..........
• .............
Financial Expectations of Microsoft
• A much better profit per unit: Under the previous partnership, Microsoft was earning less than $10 per unit and this earning had to support the entire marketing investment and platform payment support. But after the acquisition, a gross margin of more than $40 was expected with a breakeven in 50 million smart devices.
• ..................
Strategic Expectations of Nokia
Smartphone business reached a phase where the big players (Google and Apple) dominated the market with their strong ecosystems while the rest were either making losses or breaking even at best 26. At this juncture, Nokia had partnered with Microsoft. Leading business experts analyzed the rationale behind the deal from Nokia’s perspective.............
Financial Expectations of Nokia
• The ultimate objective of Nokia was to increase the revenue generation from Nokia’s mobile devices segment besides an increased market share under the global smartphone market.
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Reflections of the Acquisition
It is evident from Exhibit VI that Microsoft financials showed a steep decline. A write-off of $7.5 billion of goodwill and asset impairment charges related to phone hardware and $2.5 billion of integration and restructuring expenses, primarily costs associated with Microsoft’s restructuring plans, which affected the overall business of Microsoft...........
The Way Forward
The recent 18,000 job cuts (12,500 from Nokia), restructuring charges of $960 million and impairment charges of $7.6 billion to Nokia Device segment by Microsoft gives a clear indication that the Microsoft acquisition of Nokia was a clear blunder. The prime reason behind such strategic collaboration is for the shared synergistic benefits derived by participating organizations.................
Exhibits
Exhibit I: Operating Systems and their Market Shares in 2009 and 2010
Exhibit II: Worldwide Smartphone Sales to End Users by Vendor in 2013 (Thousands of Units)
Exhibit III: Worldwide Smartphone Sales to End Users by Operating System in 2013 (Thousands of Units)
Exhibit IV: Smartphones Revenue Predictions/Opportunity
Exhibit V: NPV Predictions by Microsoft
Exhibit VI: Comparative Analysis of Financial Parameters
