Microsoft to Buy Nokia Units and Acquire Executive

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SEATTLE -- Microsoft said it had reached an agreement to acquire the handset and services business of Nokia for about $7.2 billion, in an audacious effort to transform Microsoft's business for a mobile era that has largely passed it by.

Late Monday, Microsoft and Nokia said 32,000 Nokia employees would join Microsoft as a result of the all-cash deal, which is meant to turn the Finnish mobile phone pioneer into the engine for Microsoft's mobile efforts.

Stephen Elop, the former Microsoft executive who was running Nokia until the deal was signed, will rejoin Microsoft after the transaction closes, setting him up as a potential successor to Steven A. Ballmer, Microsoft's chief executive. Mr. Ballmer has said he will retire from the company within 12 months.

"This agreement is really a bold step into the future for Microsoft," Mr. Ballmer said in a telephone interview from Finland. "We're excited about the talent capabilities it will bring to Microsoft."

The deal, which was first broached between Microsoft and Nokia executives in February, is the latest transformation of the 150-year-old Finnish company. Nokia began life as a conglomerate making products like rubber boots and car tires before reinventing itself in the 1980s as the world's largest manufacturers of cellphones.

Nokia's once mighty position in the mobile phone business has been lost, as the industry shifted to the era of the smartphone. Samsung and Apple divide nearly all of the profits in the global smartphone business now.

Nokia's fall has been most spectacular in Asia, a region that its phones once dominated. As recently as 2010, the company had a 64 percent share of the smartphone market in China, according to Canalys, a research firm. By the first half of this year, that had plunged to 1 percent.

While Nokia phones used to be prized in Asia and other developing economies for their durability and value, the company was late to introduce innovations like touch screens. That left the high end of the market to brands like Apple and Samsung.

In the lower price ranges, smartphone makers from China have been more responsive to consumer demands, offering phones with features resembling those of their more expensive rivals at a fraction of the cost.

Risto Siilasmaa, Nokia's interim chief executive, said on Tuesday that the sale of the handset business was the logical step in the company's evolution but still pulled on his heartstrings.

"Selling a business is sometimes the right cause of action, but it's emotionally complicated," Mr. Siilasmaa said.

Consumers may be less concerned.

At a cellphone store in central London on Tuesday, Geoffrey Widdows, a 33-year-old engineer, said he had once been a devoted Nokia fan but now preferred Android phones because of the greater choice of apps available on phones from companies like Samsung and HTC.

"Everyone had a Nokia when I was growing up," he said. "You just don't see them around a lot anymore."

A megadeal between Nokia and Microsoft is something that pundits and analysts have speculated about for years, after Mr. Elop joined Nokia and signed a pact with Microsoft in February 2011 to standardize the software company's Windows Phone operating system.

The cellphone fortunes of the two companies have become closely intertwined since that agreement, but the relationship has done little to turn either company into a leader in the mobile business. Handsets running Windows Phone accounted for only 3.7 percent of smartphone shipments in the second quarter, according to the technology research firm IDC.

Nokia remains the second-largest shipper of mobile phones in the world, after Samsung, but that is largely because of lower-end feature phones, from which consumers are moving away. Nokia is no longer among the top five makers of smartphones.

A big question is whether Microsoft and Nokia will succeed as one company where they have not as close partners. Mr. Ballmer said Microsoft and Nokia had not been as agile separately as they would be jointly, citing how development could be slowed down when intellectual property rights were held by two different companies.

"There's friction," he said.

Carolina Milanesi, an analyst at Gartner, said she believed the deal could help the companies respond more quickly to the dynamism of the mobile market. "They need to move faster," she said.

By offloading its handset business, Nokia is attempting to reboot itself around its telecommunications equipment unit, NSN, its mapping and location business and an extensive patent portfolio.

In June, Nokia acquired the 50 percent stake in NSN, which provides services for both fixed-line and mobile networks, that it did not already own from its partner Siemens for $2.2 billion.

Analysts said Nokia's remaining operations were likely to benefit from increased spending from the world's largest telecommunications companies like China Mobile and Vodafone on so-called fourth-generation high-speed mobile networks.

"Nokia can get rid of the uncertainty of its handset business at a great price," said Janardan Menon, a telecommunications analyst at Liberum Capital in London. "It's a good deal for both Microsoft and Nokia."

Shares in Nokia rose 37 percent in trading in Helsinki on Tuesday.

Large acquisitions are fraught with peril, especially in the technology business, where there are challenges to integrating employees from different backgrounds into a coherent whole.

The Nokia deal echoes Google's $12.5 billion deal to acquire Motorola Mobility, which gave Google control of a trove of mobile patents and a handset business that has yet to shine under Google's ownership.

While Microsoft still has enormous stockpiles of cash from its lucrative software business, there has been widespread speculation about how long Nokia could make it as an independent company, given how the spoils of the industry have gravitated elsewhere. For Microsoft, there was a risk that Nokia could have ended up as an acquisition target for another company, creating uncertainty about the future of their earlier business partnership.

Microsoft will pay about $5 billion for Nokia's devices and services business and $2.18 billion to license Nokia's patents. The Finnish company will continue to do business as Nokia, licensing the Nokia name to Microsoft for use on its mobile phones for 10 years. "For Nokia today, it's a moment of reinvention," Mr. Siilasmaa of Nokia said in an interview.

Since Mr. Elop plans to join Microsoft after the deal is closed, which is expected to happen in the first quarter of 2014, he resigned as chief executive and relinquished his Nokia board seat to avoid conflicts of interest. He has become a Nokia executive vice president, reporting to Mr. Siilasmaa.

Mr. Ballmer declined to say whether Mr. Elop, considered a leading contender to be his successor because of his familiarity with Microsoft and the importance of mobile to Microsoft's future, will be considered for the job. "Our board is running an open succession process, considering internal and external candidates," he said.

"I think it strengthens his potential for C.E.O.," said Ms. Milanesi, the Gartner analyst. "It makes perfect sense."

Mr. Elop, a native of Canada whose family still lives in the Seattle area, said in an interview that he believed the industry was at a "tipping point" where a third mobile phone ecosystem, based on Windows Phone, will emerge as a more vibrant alternative to the iPhone and devices running Google's Android operating system.

In a sign of how vital Nokia's partnership has become to Microsoft, Mr. Ballmer said the first calls he made outside Microsoft to discuss his retirement and succession planning at the company were to Mr. Elop and Mr. Siilasmaa.

Mr. Ballmer said his conversations with Nokia about an acquisition had "heated up in the last several months," but started during a mobile industry conference in Barcelona in late February.

For Microsoft, there is also an attractive financial dimension to the deal. Because Nokia is based in Finland, Microsoft can use a portion of its foreign-held cash to pay for the acquisition, allowing it to avoid hefty taxes it would otherwise pay to take the cash back to the United States.

Microsoft took a similar approach to its $8.5 billion deal to acquire Skype, the largest deal in its history.

The plan to buy Nokia is likely to upset the other companies that use Microsoft's Windows Phone operating system on their devices, notably HTC and, to a lesser extent, Samsung. But there is little business there for Microsoft to lose. Mr. Ballmer said that Nokia's phones currently counts for more than 80 percent of the Windows Phones sold.

Mark Scott contributed reporting from London and Eric Pfanner contributed from Tokyo.

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This article originally appeared in The New York Times.


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