In 2013, Microsoft acquired Nokia's mobile phone business as part of an overall deal

totaling 5.44 billion (US $7.17 billion). This was is an extension of the strategic alliance
agreement dated 2011 between Nokia and Microsoft, wherein Nokia agreed to use
Microsofts Windows Phone for its main smartphone operating system. Further,
Microsoft also paid an additional 1.65 million to Nokia to license its patents. In this
document, we will discuss the strategic rationale behind the deal and what have been
the overall synergies gained by both companies.

EXPECTED SYNERGY GAINS

Nokia had been the world leader in mobile phones for a long time (48.7% market share
in 2007) until the advent of smartphones. However its inability to anticipate the rise of
smartphones saw its market share drop down to merely 3.7% by Q4, 2011. On the other
hand, Microsoft despite being a pioneer in the field of smartphones could never
successfully tap into the smartphone market. Its windows based Lumia series of
smartphones eventually lost out to Apples iPhone. Given Nokias brand equity, strong
distribution and after sales network, Microsoft feels that it can leverage them to boosts
its Windows based platform as an alternative to Android and iOS.
The official document describing Microsofts strategic rationale for deal announced with
Nokia, Microsoft states the objective to achieve 15% market share in 1.7 billion
worldwide smartphone shipments (255 million units) and achieve revenue of
approximately $45 billion ( 33.3 billion) by 2018. Microsofts acquisition of Nokias
Lumia and Asha brands of phones that represent the smartphone product portfolio of
Nokia covers price points ranging from around 140 to more than 500, excluding
taxes and subsidies. During 2012, Nokias Smart Devices unit shipped approximately 35
million smartphones with an average sale price of 155, leading to total revenue of
5.42 billion.

After acquisition, Nokias

phones will use in-sourced
Windows Mobile. Prior to
acquisition, Microsofts was
getting
royalties
gross
margin of $10 per Nokia
device running Windows OS
sold. Assuming that post
acquisition
this
cost
($10/device) will go away
since Microsoft will provide
the OS to its mobile devices
for free, cost of sales for Smart Devices will drop down by 259 million from in-sourcing
operating system for its smart devices. This will improve gross margin on Smart Devices
from 8.7% to 13.5%. If Microsoft gains traction in its smart devices business, then cost
of sales synergy because of in-sourcing operating system will increase.
The distribution networks of Microsoft and Nokia are similar with the exception that
Nokia \also caters to mobile network operators, especially in North America and Latin
America. Nokia sells through mobile network operators, distributors, independent
retailers, corporate customers and consumers. Microsoft on the other hand primarily
operates through OEMs, distributors, resellers and online. There will be synergies
through consolidation in distributor, reseller and online channels and will provide
Microsoft access to large supply chain and distribution channel assets. However, a
trade-off between realizing these synergies and costs to integrate the two complex
distribution networks exists.
Apart from these, one key asset which Nokia brings in during this acquisition is a highly
competent device engineering and development team along with more than a thousand
patents. While software development had always been Microsofts key forte, it did not
perform well in device designing. This was one of the key reasons that Microsoft
pioneer smartphones did not work well in the market. Integrating Nokias hardware R&D
and design team with its own gives Microsoft a significant competitive edge.

INTEGRATION AND RESTRCTURING

Microsoft and Nokia have very different core businesses; however there are still
products and services in both companies that have overlapping nature, functionalities
and target audience. In order to maximize the utilization rate of the complementary
assets and the mutual benefits and synergy of both companies, as well as to reduce
confusion to customers who were going to purchase the forthcoming Windows Phone
products, numerous products and services had to integrate together, for example:

Microsoft Bing Maps to adopt the rich geographical database of Nokia Maps
while Nokia Maps would leverage Microsoft Bings search engine and Microsoft
adCenter advertising platform;
Nokia would utilize Microsoft Bings search capabilities in its Windows Phone
products;
Microsoft to offer Nokia software development tools to develop software
applications on Nokia Windows Phones;
Nokia to integrate its operating billing payment arrangements in its Windows
Phone products;
Microsoft Marketplace would be the sole and only application and content stores
in Nokias Windows Phone products.

Because of the establishment of the strategic alliance, Nokia restructured the Group
Executive Board to form the Nokia Leadership Team, aiming to expedite decision
marking and improve time to-market of products and innovations. Nokia had also
restructured the product business units according to its new focused product categories,
namely Smart Devices (i.e. smartphones) and Mobile Phones (i.e. entry-level feature
phones). Both business units were headed by executive vice presidents Jo Harlow and
Mary McDowell, who reported directly to Stephen Elop, the CEO of Nokia at that time.
The Smart Devices business unit was responsible for creating the Windows Phone
portfolio together with Microsoft (Nokia Corporation February 11, 2011). At Microsoft,
Windows Phone was administered under the Entertainment and Devices Division. Joe
Belfiore, the Corporate Vice President and Manager for Windows Phone Program
Management at that time, was responsible in the high level management of the
Windows Phone products at Microsoft. He reported to Steve Ballmer, the CEO of
Microsoft.
After the acquisition, Microsoft laid off 25000 Nokia employees and reorganized to
combine Microsofts Windows and Devices groups under Terry Myerson, who had been
in charge of operating systems. Stephen Elop and Jo Harlow, both former Nokia
executives who respectively headed Microsofts Devices unit and phone business, both
left the company at the time. According to Microsoft, this restructuring would help align
goals and resources.