Microsoft buys Nokia handset business for €5.4bn

Microsoft is to acquire Nokia's mobile phone arm in a swansong deal for the software giant's long-serving chief executive, Steve Ballmer, delivering Europe's last big handset maker into American ownership.

For €5.44bn (£4.6bn), Nokia is casting off the business that once represented Finland's most important export, in a deal that will result in 32,000 staff transferring to Microsoft.

Overtaken in the smartphone arena by Apple and Samsung, Nokia's board agreed to end the company's decades-long role as a pioneer and once-dominant player in one of the most revolutionary technologies in modern history.

Nokia's chief executive, Stephen Elop, has stepped down from the company's board, and will transfer with the handset business to Microsoft, where he will become head of the devices division after the transaction's expected completion in the first quarter of 2014.

"Today's announcement is a bold step into the future," said Ballmer. "For Microsoft it is a signature event in our transformation."

The acquisition marks the boldest step yet taken by Microsoft in its recently announced strategy of moving decisively into the device-manufacturing business, so that it can design for the software and hardware of its products. It is a move Ballmer hopes will bring the kind of success currently being enjoyed by Apple.

In a dramatic month for America's most successful consumer software group, Ballmer announced his retirement from the company within 12 months after 13 years at the helm. Elop, already tipped as a potential successor, is now seen as the most likely heir to the company still chaired by its founder, Bill Gates. "Elop becomes a really strong candidate for the CEO role," said Roberta Cozza, a research director at Gartner. "He is someone who has demonstrated that he can run a software unit at Microsoft and has his tenure as the CEO of a hardware company."

"I feel sadness because we are changing Nokia and what it stands for," said Elop, at an emotional press conference at Nokia headquarters in Espoo. "We are a challenger and as the news ripples around the world today we will be recognised as an even greater challenger to our competitors."

Nokia has staked a claim to a growing but small share of the smartphone market, with 7.4m of its Lumia handsets shipped in the most recent quarter. Samsung shipped 71m smartphones in the second quarter, according to Gartner, and Nokia is no longer among the global top five.

"I share the frustration that comes from being so far behind two very large competitors," said Elop. "We are going faster than Nokia has ever done before. Achieving our goal of becoming the third ecosystem is becoming very real."

Elop, who formerly headed Microsoft's business services unit, intertwined Nokia's fortunes with Microsoft two years ago when he announced he would abandon the Finnish company's attempts at creating its own smartphone software, opting instead for the Windows Phone operating system.

Microsoft heavily subsidised Nokia's strategy, providing hundreds of millions in marketing dollars per quarter to support the significant advertising spend needed to tempt customers unfamiliar with the Windows Phone interface.

As head of Microsoft's devices unit, Elop will oversee not only phones but its best selling Xbox games console and its Surface tablet computer, which has so far failed to register with consumers. Julie Larson-Green, who currently heads devices and studios at Microsoft and had been seen as a contender for the top job, will report to Elop.

Risto Siilasmaa, Nokia's chairman, will take over as chief executive of the company in the interim. "This transaction makes all the sense rationally but emotionally it is complicated," he admitted, saying the decision was made because Nokia needed more cash if it was to compete with larger smartphone rivals.

The market, he said, "is becoming a duopoly with the leaders building significant momentum with a scale not seen before, while many established players have disappeared or faced difficult choices".

Microsoft will retain its mobiles research and development facility in Finland, where 4,700 Nokia staff are currently employed, and Ballmer said: "We have no significant plans to shift around the world where work is done. We are deeply committed to Finland."

The US company said it would build a datacentre in Finland to serve customers in Europe.

Microsoft is also providing €1.5bn of "immediate financing" to Nokia, implying that the Finnish company has hit a cash crunch. Its debt has already been reduced to "junk" status. If used, the loan will be repayable when the deal closes.

The remaining part of Nokia will be dominated by Nokia Siemens Networks (NSN), which builds mobile phone infrastructure and a mapping platform called Here. Elop recently completed the acquisition of 50% of NSN that was owned by Siemens. These rump assets currently employ 56,000 people and have revenues of €15bn.

But even inside cash-rich Microsoft, Nokia's phone business faces serious challenges. Its handset business has slumped in size from a peak in the third quarter of 2010, with revenues of €7.2bn, to just €2.72bn in the second quarter of this year, its smallest size in more than a decade. It has also been loss-making for five of the past six quarters.

While it is strong in the "feature phone" business in the developing world, it has struggled in the all-important smartphone business. Apple's iPhone and handsets running Google's Android together make up over 95% of sales in the US and China, the world's two largest smartphone markets, according to Kantar Worldpanel's latest figures. Windows Phone only has shares above 10% in Mexico and France, according to the company's figures.

Under the deal, Microsoft is buying the Lumia and Asha brand names that Nokia has used for its smart and intermediate phones. It has licensed the use of the Nokia brand on handsets for 10 years, but the Finnish business will retain ownership of the brand. That will probably mean that the Nokia brand disappearing from handsets in the next decade, ending over 30 years' history in the business.

Having started in 1865 with a pulp mill in the Finnish town of Tampere, Nokia reinvented itself repeatedly, shifting to rubber boot production early in the 20th century, and then making its first telephone exchange in the 1970s. Its first mobile phone appeared in 1981.

Rumours that Microsoft intended to buy Nokia had been floated since Elop joined the company. Reaction to the deal was mixed.

"Microsoft buying Nokia looks like doubling down on the current failing strategy, without changing the dynamics that are preventing success," cautioned Benedict Evans at Enders Analysis.

Ben Wood at CCS Insight described the deal as a "bold, but entirely necessary gamble by Microsoft".

"Mobile needs to be a cornerstone of Microsoft's business for future success," said Wood.

"This is by no means a silver-bullet solution to Nokia and Microsoft's current difficulties. The massive restructuring that has taken place within Nokia over the last two years offers Microsoft a more stable foundation on which to focus its efforts in mobile, but Windows Phone remains a distant third place in the smartphone race."