Sunday, September 22, 2013

Microsoft Nokia Deal Summary

Microsoft Corporation and Nokia Corporations announced a deal on September 3, in which Microsoft would pay $7.17 billion USD to purchase Nokia’s Devices & Services business and license Nokia’s patents. Microsoft will utilize its overseas cash reserves to complete the transaction. At the end of Q2-2013, Microsoft’s cash and short-term investments totaled more than $76 billion. Nokia’s mobile business, which Microsoft purchased for 3.79 billion Euros, generated nearly half of Nokia’s 30.2 billion Euro revenue. In all, the purchase was a bargain for Microsoft.

The challenge comes to integrating the businesses. More than 30,000 Nokia employees were brought into Microsoft, including former CEO Stephen Elop. The two companies have been in partnership since 2011, and this deal is the second largest acquisition Microsoft has ever done. The acquisition also marks a remarkable transition in the Windows business model: vertical integration, as Microsoft aims to introduce its Windows Phone software into the hardware units. Microsoft has long touted a separation of software and hardware in the PC era. But as mobile hardware has been less commodity-like than computer hardware, Microsoft expects this deal to be accretive to its adjusted EPS starting in fiscal year 2015. Microsoft had been receiving less than $10 in software licensing fees from Nokia, but now can make more than $40. The challenge becomes selling more Windows phones. Currently it lags behind Android and iOS. And with Apple introducing reduced-cost iPhone models, the challenge becomes even harder for Windows Phone to find its niche.

Two weeks after the Nokia deal, Microsoft announced that it would increase its dividend 22% over the previous quarter, and authorized up to $40 billion in share repurchases.

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