Microsoft is set to buy Finnish vendor Nokia’s main handset business in a €5.44bn (US$7.16bn) all-cash deal as it looks to expand its share of the smartphone market.
The move comes just two years after Nokia CEO Stephen Elop, a former Microsoft…
Microsoft is set to buy Finnish vendor Nokia’s main handset business in a €5.44bn (US$7.16bn) all-cash deal as it looks to expand its share of the smartphone market.
The move comes just two years after Nokia CEO Stephen Elop, a former Microsoft executive, led its high profile switch to the US technology giant’s Windows Phone software.
Elop will now return to Microsoft as head of its mobile devices business, and has been tipped as one of the frontrunners to replace Steve Ballmer, who plans to step down as CEO of the US group within a year.
Using offshore cash, Microsoft plans to buy substantially all of Nokia’s devices and services business for €3.79bn, as well as certain patents for €1.65bn. The operations it is acquiring generated roughly €14.9bn in 2012 – nearly half of Nokia’s net sales for that year.
Nokia has struggled to compete with smartphone giants Apple and Samsung, and analysts said the deal will help Microsoft gain a stronger foothold in emerging markets.
Ballmer said: “It’s a bold step into the future – a win-win for employees, shareholders and consumers of both companies. Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.”
Following the deal, which is subject to regulatory approvals and a Nokia shareholder vote on 19 November, the Finnish vendor said it will focus on its three established businesses: network infrastructure group NSN, mapping and location services firm HERE, and Advanced Technologies, which focuses on technology development and licensing.
Nokia will continue to own and manage the Nokia brand, and has agreed to license it to Microsoft under various commercial agreements. The Finnish vendor also plans to grant Microsoft a 10-year non-exclusive licence to its wider patent portfolio, and agreed a separate, four-year deal for the US technology giant to use its HERE platform.
Nokia chairman Risto Siilasmaa said: “For Nokia, this is an important moment of reinvention and from a position of financial strength, we can build our next chapter.
“After a thorough assessment of how to maximise shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders.”
The companies expect to close the deal in Q1 2014, when approximately 32,000 people will be transferred to Microsoft. There is also a US$750m termination fee if the deal fails to receive regulatory approval. TelecomFinance understands that JP Morgan is advising Nokia on the transaction. Microsoft is reportedly being advised by Goldman Sachs.
Nokia and Microsoft declined to comment on their advisers.
Ajay Bhalla, professor of global innovation at Cass Business School, raised questions over how Nokia’s board arrived at its deal valuation, given that Microsoft paid US$8.5bn to buy VoIP provider Skype in 2011.
“Not only will Microsoft get access to Nokia’s impressive intellectual assets for small change, it will also get access to Nokia’s well-established infrastructure and competencies in emerging markets – where it continues to retain an impressive market share,” said Bhalla.
Meanwhile Victor Basta at Magister Advisors pointed to how Nokia had already been effectively acquired by Microsoft after becoming entirely reliant on its mobile phone software.
According to Basta, Nokia’s value has eroded progressively since, making its mobile business even more attractive to Microsoft.
“In the meantime Microsoft has had the chance to work with Nokia and learn about the business, so this now looks like a safe deal for Microsoft,” he said.
“The burning question, of course, is whether Nokia’s gradual erosion – in market share, value and perception – can be reversed.”
Extra financing
Whether the transaction closes or not, Microsoft has pledged to make available €1.5bn of financing to Nokia, which will be split into three €500m tranches of convertible notes that will again be funded from overseas resources.
The tranches will mature in five, six and seven years, respectively.
The five-year tranche has a 1.125% per annum coupon, payable semi-annually with an initial conversion price of €3.9338. The six-year notes have a 2.5% per annum coupon payable semi-annually with an initial conversion price of €4.0851. The final, seven-year bond has a 3.625% per annum coupon payable semi-annually with an initial conversion price of €4.2364.
Nokia’s board has yet to decide whether it will draw down some or all of this financing. If it does decide to tap the debt, the earliest Microsoft could convert any of the notes into shares will be two years from draw down.
Leadership shake-up
With Stephen Elop stepping aside as Nokia CEO and president with immediate effect to avoid any potential conflict of interest, its chairman Risto Siilasmaa is filling the role on an interim basis. Although Siilasmaa will remain as company chairman, he will no longer be a member and chairman of Nokia’s corporate governance and nomination committee.
While continuing to serve as Nokia CFO, Timo Ihamuotila will also become president of Nokia on an interim basis.
Meanwhile Marko Ahtisaari, Nokia’s executive vice president of design, has announced plans to step down on 1 November to pursue entrepreneurial opportunities, although he will continue to work on activities related to the acquisition until 30 November.
He will be replaced by Stefan Pannenbecker, who is head of product design at the group.
