From virtually the day that Nokia (NYSE:NOK) and Microsoft (Nasdaq:MSFT) began working together on mobile handsets and smartphones investors have speculated whether Microsoft would acquire Nokia's handset business. Not only had Nokia continued to struggle with the transition to smartphones, some argued that Microsoft would want to “control its ecosystem” in the same way that Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) do through their software and hardware operations.
That all came home to roost on Tuesday, as the two companies announced a transformative deal that will see Microsoft acquire Nokia's phone business and license significant intellectual property (IP). After the deal, Nokia will be a cash-rich wireless infrastructure company, while Microsoft will be much more geared towards handsets and consumer devices.
Assuming that Nokia and Microsoft get all of the necessary approvals, Microsoft will acquire Nokia's Devices and Services business for EUR 5.5 billion (or about $7.3 billion). Within that figure, Microsoft is paying EUR 3.79B in cash for the D&S business and EUR 1.65B for a 10-year non-exclusive IP licensing agreement. The deal also includes an agreement whereby Microsoft will license and use Nokia's mapping technology and services. As part of the deal, Microsoft will immediately make EUR 1.5B available to Nokia through a three-tranche debt structure.
Microsoft will be using its large hoard of overseas cash to pay for this deal. The company will be adding roughly 32,000 Nokia employees, as well as the handset unit's production facilities. Current Nokia Stephen Elop will join Microsoft as the leader of its devices business; he is already rumored to become the CEO of all of Microsoft upon Steve Ballmer's retirement.
Another New Nokia
As I'm sure many other writers and analysts will write today, Nokia has a long history of innovation and transformation, having once been involved in businesses like pulp/paper, rubber, and power generation. With this deal, Nokia exits a business where it was once incredibly successful but had been surpassed by rivals such as Apple and Samsung.
With the previously-announced acquisition of Siemens' (NYSE:SI) stake in Nokia Siemens Networks, Nokia will now be mostly a wireless equipment company with roughly 15% market share against competitors like Ericsson (Nasdaq: ERIC), Huawei, and Alcatel-Lucent (NYSE:ALU). To that end, it's well worth wondering if Nokia will use that sizable net cash balance to add scale through acquisitions – companies like Ciena (Nasdaq:CIEN), Finisar (Nasdaq:FNSR), and Alcatel-Lucent would all be affordable.
Nokia will likely need to find a new CEO. Chairman Risto Siilasmaa will take the CEO role for now. It will also be interesting to see what Nokia does with its Advanced Technologies unit – a sort of “skunkworks” within Nokia that has been working on projects including nano tech and graphene.
A Lot of Work For Microsoft to Do
Microsoft has taken a lot of criticism for its efforts in devices, included the Surface tablet. Spending billions on a handset business widely considered to be noncompetitive is not likely to please investors, but Nokia's business may be somewhat stronger than commonly reported. New handsets have done well at the low end of the smartphone market, and though Nokia's position in the U.S. is still weakening, the company has been doing better in Western Europe, Latin America, and Asia.
The Bottom Line
Nokia's shares are likely to soar in Tuesday trading, as the company got excellent value for its handset business and now has a very clean balance sheet with significantly less operating risk (the networks business has been doing pretty well lately). Fair value on these shares will likely jump to the EUR 4.50 to 5.00 level, or about $6.00 to $6.65.
For Microsoft, I expect a pullback in the shares. Investors will have to accept that Microsoft has made consumer mobile devices a priority and taken on the challenge of competing with the phones of Apple and Samsung and the operating systems of Apple and Google.
Disclosure – As of this writing, the author has no financial positions in any companies mentioned.