Insight: As Finland reels, Microsoft doubles down with Nokia phone deal

Insight: As Finland reels, Microsoft doubles down with Nokia phone deal

HELSINKI/SEATTLE - In an era when shiny new tech start-ups can be worth tens of billions of dollars, Microsoft's deal to acquire Nokia's mobile handset business for 5.44 billion euros (S$9.1 billion) is a modest one from a strictly financial point of view.

Yet the deal is likely to go down as a major turning point in the contemporary technology business, one that marks the end of a Finnish company's unlikely run as world-beating tech icon even as it shapes the future of Microsoft Corp - for better or for worse.

In Finland, politicians and business leaders mourned the fall of Nokia, while pensioners wondered what it all meant for them. In Seattle, the chatter centred on what the deal might say about the race to succeed Microsoft Chief Executive Steve Ballmer, who announced 10 days ago that he would step down within a year.

For the global telecom industry, meanwhile, the deal signals further consolidation, coming just a day after Verizon announced a US$130 billion (S$166.5 billion) deal to buy Vodafone's stake in its wireless unit. It could also help Microsoft achieve its long-held ambition of becoming a major rival to Apple and Samsung in the global smartphone business, though it will also put even more pressure on the company to show that its massive investments in consumer devices make sense.

The Nokia deal "unequivocally suggests they aren't exiting the business and in fact are doubling down on mobile," said Todd Lowenstein, a portfolio manager at HighMark Capital Management, which holds Microsoft shares.

"They can in all likelihood carve out a decent niche with their scale as a fully integrated player, however investors are questioning the merits," Lowenstein added. "The markets have spoken volumes." Microsoft shares finished down 4.6 per cent on Tuesday.

Nokia and Microsoft have been joined at the hip since early 2011, when the Finnish company agreed to adopt Microsoft's Windows Phone software for its smartphones - a big gamble for Nokia, but one that came at a time when the company's market share was already in a freefall and it had few good options.

Since then Nokia has produced a series of Windows-powered phones that were mostly well-reviewed by critics, though largely shunned by customers.

There had been speculation from the start that Microsoft might eventually buy Nokia, but many analysts thought Microsoft had the best of both worlds - a committed hardware partner, but none of the considerable downside risk that might go with owning a phone-maker.

Behind the scenes, though, friction developed, according to a source familiar with the situation, especially after Microsoft launched its Surface tablets last fall.

"Each was trying to spend money on app developers, music stores, all the parts critical to the ecosystem," said the source. "It all came to a head at the end of last year, beginning of this year - was this really the right way to work or are we better as one entity?"

Discussions on an acquisition began in earnest in February, after Ballmer approached Nokia for an "open dialogue." Ballmer and Nokia board chairman Risto Siilasmaa met at the Mobile World Congress in Barcelona. After a few hiccups the negotiations kicked into high gear in July, with almost 50 board meetings on the part of Nokia.

Another source close familiar with the negotiations said the timing of the deal, which was called "Project Gold Medal" at Microsoft, was influenced by Ballmer's announced departure, with Nokia seeking to wrap it up before a new CEO was named. Nokia officials were concerned that if it delayed it could end up with facing a firesale down the road as its cash position worsened, the source said.

For Microsoft, moving ahead with a major strategic acquisition even as it seeks a new CEO reaffirms its commitment to being a broad-based "devices and services" company - a strategy crafted by Ballmer and one which was at the heart of a major reorganisation announced just weeks ago.

On Tuesday, Microsoft called the Nokia deal "a huge leap forward on our journey of creating a family of devices and services that delight people and empower businesses of all sizes."

People close to the situation rejected the idea that the transaction meant that Nokia CEO Stephen Elop, a former Microsoft executive who will rejoin the company as head of the devices and services division, would automatically succeed Ballmer. But analysts said the move could make it harder to bring in an outsider CEO who might want to revisit all aspects of the company's strategy.

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