The deal

Last week, Microsoft (MSFT) announced that it is buying Nokias (NOK) Devices & Services business for $5 billion, plus another $2.2 billion for licensing rights to many of Nokias patents. The Nokia deal means Microsoft is taking over Nokias mobile phone design and manufacturing business. Microsoft will be building its own phones plus taking on a whopping 32,000 employees from Finland and around the world. While not officially in control of Nokia, Microsoft has called the shots in its relationship for the past two years - to the point of dictating the details of Nokia's launch events

STATS:
Micro CEO steve balmer. Nokia ceo Stephen Elop

Why did they do it. (adv). And difficulties faced in future.

MICROSOFT PERSPECTIVE
Like Apple, you can make devices that integrate software and hardware together and hope to sell a single, unified, highly profitable product. Heres one possible answer. Microsoft is buying Nokia as a defensive move. Nokia accounts for nearly 82 percent of Windows Phone smartphone shipments and the purchase pre-empted Nokia partnering with Android or filing for bankruptcy. Microsoft simply can't afford to let the #1 manufacturer of smartphones using its Windows Phone platform add new platforms or fail. Heres another. Microsoft is buying Nokias CEO, Stephen Elop, as Steve Ballmers successor. Elop ran Microsofts business software division before joining Nokia in 2011 and was the man behind the decision to adopt Windows Phone as the companys sole smartphone platform. With this acquisition, he will rejoin Microsoft to run its smartphone business.

MICROSOFT BOUGHT NOKIA POSSIBLY BECAUSE.. Microsoft will get greater foothold in the market as it will not have hardware capabilities along with software expertise
Here's the official reasoning: Building on the partnership with Nokia announced in February 2011 and the increasing success of Nokias Lumia smartphones, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing. For Nokia, this transaction is expected to be significantly accretive to earnings, strengthen its financial position, and provide a solid basis for future investment in its continuing businesses.

Meaning 1. It can now control both the software and hardware. This would finally make it possible for Microsoft to imitate Apples winning recipe

2.To lower transaction costs.. In the case of two separately owned companies, there are
negotiations to be undertaken, contracts have to be drawn up, inspections have to be made, arrangements have to be made to settle disputes and so on. These costs have come to be known as transaction costs. We know that companies often became vertically integrated as they grew. Transaction costs are why a manufacturer of car tyres would come to own and operate rubber plantations in some tropical country; not because its executives want to farm rubber, but because the transaction costs of not owning the supplier are higher than the costs of operating it themselves.

While Microsoft and Nokia were working closely together on the hardware and software for their phones they werent working together closely enough. Those pesky transaction costs getting in the way there. Thus the bet that by being owned by the same company those costs will be reduced and thus better phones will be made.

3.Coordination; Nokia and Microsoft worked closely together on the companys Lumia
1020, and Microsoft made core changes to its Windows Phone operating system as a result. Sources familiar with Microsofts Windows Phone work have revealed to The Verge that Nokia was left frustrated by some Windows Phone restrictions on its Lumia 1020 camera software. Specifically, the restrictions made it difficult to store the large image files and make them easily accessible to phone owners. These secrets secrets and frustrations will no longer occur, and the collaboration appears to have helped Microsoft realize its priorities elsewhere. A Bluetooth file sharing feature is particular popular in developing countries, but Microsoft wasnt aware as US consumers

dont typically use it. We didnt even have that feature, and we didnt even understand or appreciate the degree to which it was critical, says Belfiore.

4.faster innovation ;Nokia never had a problem with innovation: it holds one of the
largest patent portfolios in the tech industry, and collects billions of dollars per year to prove it. But what it always had was a problem with bringing that innovation to market. Nokia engineers were talking about single-button touchscreen smartphones years before the iPhone, but failed to bring their brilliant prototypes to market. (And failing to bring great concepts to market is something that Microsoft, too, has been guilty of. Potential innovations like the Courier floated around and then died. The company had prototype ereader hardware around years before the Kindle, and failed to bring it to market. In both cases, the reason for the failure to bring innovation to market was simple: protecting the Windows brand. If it doesn't run Windows (or isn't called Windows), Microsoft won't ship it no matter how innovative it is.)

5. Marketing, branding and advertising; Microsoft/Nokia might be able to drive better deals
for ads and consolidate its work into a single agency, but there aren't billions of dollars of savings to be made there.

So if the official reasons make such little sense, why did Microsoft buy Nokia? Ben Thompson makes a good case that the Microsoft/Nokia deal was driven by an immanent switch to Android or bankruptcy: I theorize that Nokia was either going to switch to Android or was on the verge of going bankrupt. (I suspect the latter: part of the deal included 1.5 billion in financing available to Nokia immediately). And, had Nokia abandoned Windows Phone, then Windows Phone would be dead. Nokia was either going to go down the tubes, or admit defeat and move into the Android camp. This would have killed Windows, and condemned the Windows brand to the PC ghetto. And Windows is sacred: a few billion dollars of offshore cash (which Microsoft couldn't bring back into the US anyway without incurring lots of tax) is a small price to pay to protect the sacred cow of Windows.
A driving force behind the sale seems to be Nokia's low-end Asha brand, which Microsoft has acquired outright. Asha gives Microsoft a far larger footprint for Windows Phone, and access to

millions of customers in developing countries that it plans to use as an "on-ramp to Windows Phone." In fact, Microsoft's licensing deal for the Nokia brand doesn't include future Lumias Nokia as a smartphone brand is effectively dead, as Microsoft takes the lineup in-house.

It will require a gigantic turnaround in its mobile division to justify the acquisition and make a decent return on invested capital. The

challenges it faces are

1. Microsoft is traditionally not a hardware company and to build a culture that embraces the collaboration of both software and hardware engineers is difficult. That is why Apples culture is unique. 2. Academic literature shows that most acquisitions fail to deliver on expectations. I bet it will be the same for Microsoft. 3. It will not be easy to integrate 32,000 employees that have previously been proud Nokia workers. They now have to accept they lost and are being swallowed by a big American corporation. Morale , too ,is likely to be low and Microsoft has to be extremely fast to get back into the game. 4. Microsofts Windows Phone is not selling as expected and Nokia is also disappointing on sales figures with the brand unable to lure consumers to switch from their Apple and Samsung smartphones. 5. The easy money in smartphones is already gone as the industry matures. 6. Integrating Nokia in a lean way that speeds up innovation.bringing it to the market rapidly. 7. MARKETING: If Microsoft wants to sell anything, it's going to have to ramp up the quality and quantity of marketing. Samsung outspends everyone else enormously when it comes to marketing, and even the cash reserves of Microsoft won't make up for a gap that big. Can Microsoft really compete with a company that spends more on marketing than Apple, HP, Dell, Microsoft and Coca Cola combined 8. Branding., you have two brands, which is confusing and expensive. And given the license to Nokia that Microsoft has paid for, unlikely.to ditch the nokia brand.

Microsoft investors didn't exactly show their faith on Tuesday, sending the company's shares down 4.6% to $31.88 Mr. Ballmer argued Tuesday that Google and Apple don't have a permanent lock in the mobile business. Microsoft also is working from a position of financial strength. The company generates more than $70 billion of annual revenue, and the Nokia acquisition will barely dent Microsoft's $77 billion cash stockpile.

For now, smartphones powered by Microsoft's Windows Phone operating software are neither affordable enough to appeal to cost-conscious mobile buyers opting for Android phones, nor slick enough to win over fans of high-cost gadgets from Apple and Samsung.

NOKIA PERSPECTIVE (why did they do it )

Nokia was a pioneer in smartphones but it rapidly lost ground to rivals like Apple and Samsung. Nokia had a 35% share of all smartphones in 2007, when the iPhone was just getting off the ground and the business was dominated by BlackBerry and Microsoft, according to Euromonitor International. By 2012, Nokia was responsible for less than 6% of all smartphones sold. Samsung also overtook Nokia last year as the world's biggest seller of all mobile phones, including basic models like flip phones.
Operating income has plunged from EUR 7.7 billion to minus EUR 1.1 billion in 2012. The cause? 1. Apples disruption of the mobile industry with its groundbreaking iPhone, the first truly smartphone that excited the consumers. 2. South Koreas giant Samsung outpaced Nokia by delivering a full suite of good smartphones running Googles Android OS at various price points attacking Nokia on all fronts. Nokia was too slow to adapt, and as happens in nature when an animal does not adapt, the companys mobile business died. Microsoft is paying EUR 5.44 billion for Nokias devices and services division absorbing 32,000 employees, a patent portfolio, the Nokia brand a mobile hardware production.

The biggest gainer from the recent Nokia-Microsoft deal is probably Nokia Solutions and Networks (NSN), more so in the current environment of consolidation in the telecom equipment vendor segment. The deal not only renews the focus of the parent company, Nokia, on the telecom equipment giant but also allows the company to take advantage of the current consolidation phase in the telecom equipment market. "It is an absolute positive for us. It allows us to maintain a very strong balance sheet. It allows us to have a very good cash position...As a company we have said that this industry will end up with three

strong global players. Any time when the industry is consolidating, then financial strength is good," Barry French, Executive Board Member, Executive VP - Marketing, Communications and Corporate Affairs, NSN told Light Reading India.

This is a very good deal for Nokia as 1. it gets out of the mobile business before it takes down its other divisions. 2. Nokias mobile divisions operating income is still not positive so it is a very good deal. 3. The deal reduces Nokias business and financial risk 4. the bondholders of nokia came out as the biggest winners.

Is Nokia now interesting for long-term investors?

"Nokia will look very different without the mobile devices and services business," Siilasmaa said. "But it will be a strong company, with healthy finances and three strong businesses -NSN, Here, and Advanced Technologies -- each a leader in technology and innovation."

1First up is NSN (Nokia Solutions and Networks). Nokia's network business sells products and services to companies around the world, and Siilasmaa sees it as strong and independent.
"NSN is the mobile broadband specialist and especially strong in LTE," the chairman said. "With our strong and focused investment in R&D, we will continue to launch uniquely innovative solutions such as the Liquid Applications that was announced in Barcelona earlier this year."
NSN went through restructuring recently and decided to focus on mobile broadband only. It decided to lay off a significant number of employees and sold off many of its non-core units during the restructuring process. Earlier this year, Nokia agreed to buy German engineering giant Siemens' 50 per cent stake in their mobile broadband joint venture NSN for 1.7 billion euros (USD 2.2 billion). Subsequently, the company was renamed Nokia Solutions and Networks (NSN). (See: What's Ahead For Nokia Minus Siemens?) The prospects of NSN making an acquisition are high in this scenario. "As a company we are always open to strategic acquisitions but while earlier we may have had some financial constraints, it is a different story now," says French.

2Another business key to Nokia is HEREaccording to Siilasmaa. Nokia's

Here offers real-time traffic reports, maps, and other cloud-based benefits to drivers of Internet-connected cars. On Tuesday, Nokia announced that it is teaming up with MercedesBenz to create maps for self-driving cars. "HERE is already available in four out of five cars with in-dash navigation and we have mapped millions of kilometers of road across the world," Siilasmaa said. "And we're committed to continue to extend our coverage."
Microsoft will pay Nokia for a four-year license of the HERE services, bringing the new company more revenue and stability than it had previously.

3. a new business that the company will form. Known as Advanced Technologies, the new unit will focus on beefing up Nokia's patent portfolio.
Nokia's investment in research and development also helped us build what we believe is the largest and strongest intellectual property portfolio in our industry, with around 10,000 carefully selected patent families," Siilasmaa said. "We've already established a successful patent and technology licensing operation, which we will expand to continue to drive revenue and profit for Nokia through the new Advanced Technologies business."

..The only thing we know is that the network business is not generating positive operating income and that the business is extremely competitive with low margins. The job is not done for Nokia. In fact the struggle might continue, but today Nokia is the winner

Statistics(nok decline)
After nearly three years of working with Nokia, Microsoft is a distant No. 3 in smartphones world-wide, with its mobile software accounting for about 4% of the market compared with a combined 90% share for Apple and Google software. Nokia's smartphones make up a negligible share after commanding nearly half of the market

nokia: 40 bill euoros annual sales

By 2012, it was the world's second-largest mobile phone maker in terms of unit sales (afterSamsung), with a global market share of 18.0% in the fourth quarter of that year.[6] Now, Nokia only has a 3% market share in smartphones.[7] They lost 40% of their revenue in mobile phones in Q2 2013. Nokia is a public limited-liability company listed on theHelsinki Stock Exchange and New York Stock Exchange.[8] It is the world's 274th-largest company measured by 2013 revenues according to the Fortune Global 500.[9] Nokia was the world's largest vendor of mobile phones from 1998 to 2012.[6] However, over the past five years its market share declined as a result of the growing use of touchscreen smartphones from other vendors principally theiPhone, by Apple, and devices running on Android, an operating system created by Google. The corporation's share price fell from a high of US$40 in late 2007 to under US$2 in mid-2012.[10][11] In a bid to recover, Nokia announced a strategic partnership withMicrosoft in February 2011, leading to the replacement of Symbian with Microsoft's Windows Phone operating system in all Nokia smartphones.[12] Following the replacement of the Symbian system, Nokia's smartphone sales figures, which had previously increased, collapsed dramatically.[13] From the beginning of 2011 until 2013, Nokia fell from its position as the world's largest smartphone vendor to assume the status of tenth largest Following the second quarter of 2013, Nokia made an operating loss of 115m (98.8m), with revenues falling 24% to 5.7bn, despite sales figures for the Lumia exceeding those of BlackBerry's handsets during the same period. Over the nine-quarters prior to the second quarter of 2013, Nokia sustained 4.1 billion worth of operating losses
had a new high 8.2% market share in Europe, with over 85% of the sales accounting for Nokia's Lumia line. For fiscal Q2 2011 ending in June 2011, Nokia reported a net loss of 492 million, despite a 430 million payment from Apple. Nokia cited decline in its mobile phone business as the primary cause of the [202] loss. In Q1 2012 results were bleak. Nokia lost 1.34 billion. Revenue is down almost a third from a year [203] ago. By May 2012, Nokia share price had fallen 37.5 percent since the beginning of the year, and was down 61 percent in the last year Once, almost 7 out of 10 phones sold in India were made by Nokia. Today, Samsung is the market leader with a 31.5% share, according to Voice and Data, a trade publication. Nokia has a 27.2% share. Worse, its revenue fell 18% between 2011-12 and 2012-13, down to Rs.9,780 crore.(1.5 bill $)

Revenue Operating income Net income Total assets

30.176 billion (2012)[2] -2.303 billion (2012)[2] -3.106 billion (2012)[2] 29.949 billion (2012)[2]

Total equity Employees

8.061 billion (2012)[2] 97,798 (2012)[2]

Revenue Operating income Net income Total assets Total equity Employees

US$ 77.85 billion (2013)[1] US$ 26.76 billion (2013)[1] US$ 21.86 billion (2013)[1] US$ 142.43 billion (2013)[1] US$ 78.94 billion (2013)[1] 97,000 (2013) [2]

Indian impact
Microsoft may reduce or remove the huge amount it charges for licencing its mobile operating system Windows 8, according to Mansi Yadav, senior market research analyst, smartphones and tablets, IDC India. The company, she added has said it wants to get into the sub-Rs.10,000 device segment for volumes. A low-priced Lumia (the Nokia smartphone powered by Windows 8) or a new smartphone could significantly improve the prospects of Nokia in India. This may put some pressure on Indian players. It is not a good sale. The Nokia device market is valued at $12 billion and the Nokia brand is the 15th or 16th most valued brand, valued at $14 billion. Microsoft is paying $7.2 billion.