Microsoft Corp is buying Nokia Corp's line-up of smartphones and a portfolio of patents and services in an attempt to strengthen its fight with Apple Inc and Google Inc and capture a slice of the lucrative mobile computing market.
The euro5.44 billion (US$7.2 billion) deal announced late Monday marks a major step in the company's push to transform itself from a software maker focused on desktop and laptop computers into a more versatile and nimble company that delivers services on any kind of Internet-connected gadget.
"It's a bold step into the future — a win-win for employees, shareholders and consumers of both companies," Microsoft CEO Steven Ballmer told reporters at Nokia's headquarters in Finland Tuesday. "It's a signature event."
Microsoft, based in Redmond, Washington, has been racing to catch up with customers who are increasingly pursuing their digital lives on smartphones and tablet computers rather than traditional PCs. The shift is weakening Microsoft, which has dominated the PC software market for the past 30 years, and empowering Apple, the maker of the trend-setting iPhone and iPad, and Google, which gives away the world's most popular mobile operating system, Android.
Narrowing the Gap
Microsoft is now betting it will have a better chance of narrowing the gap with its rivals if it seizes complete control over how the mobile devices work with its Windows software.
Investors in Nokia welcomed the deal, sending shares in the company up more than 35 per cent to euro4.03 in Helsinki. Microsoft's shares, however, were down 4.4 per cent at US$31.93 in early trading in the US.
Speaking to investors and analysts Tuesday, Ballmer admitted that the company has to play catch-up with the likes of Apple and Android.
"We know we need to accelerate. We're not confused about that," he said.
"We need to be a company that provides a family of devices."
Nokia, based in Espoo, near the Finnish capital, and Microsoft have been trying to make inroads in the smartphone market as part of a partnership forged in 2011.
Under the alliance, Nokia's Lumia smartphones have run on Microsoft's Windows software, but those devices haven't managed to compete with iPhone or the array of Android-powered devices spearheaded by Samsung Electronics' smartphones and tablets.
Terry Myerson, Microsoft executive vice-president of operating systems, admitted to a call to investors Tuesday that the message about the company's products has not been getting through to consumers and that "marketing approaches we've used in the past have been inefficient."
The acquisition is being made at the same time that Microsoft is looking for a new leader.
Just 10 days ago, Ballmer, 57, announced he will step down as CEO within the next year.
Stephen Elop, who left Microsoft in 2010 to become Nokia CEO, will step down as president and CEO of the company to become executive vice-president of Nokia devices and services and will rejoin Microsoft once the acquisition closes.
The deal has fuel led speculation that Elop, a former Microsoft executive, will emerge as a top candidate to succeed Ballmer.
Nokia board chairman Risto Siilasmaa told reporters that they had been preparing the deal since February.
"It's been an extremely pragmatic and deeply analytical process where we have left no stone unturned to understand all the possible alternatives for the company going forward," said Siilasmaa, who will be Nokia's interim CEO.
Microsoft hopes to complete the deal early next year. If that timetable pans out, about 32,000 Nokia employees will transfer to Microsoft, which currently has about 99,000 workers.
The proposed price consists of euro3.79 billion (US$5 billion) for the Nokia unit that makes mobile phones, including its line of Lumia smartphones that run Windows Phone software.
Another euro1.65 billion euros ($2.2 billion) will be paid for a 10-year licence to use Nokia's patents, with the option to extend it indefinitely. Ballmer said that Microsoft will invest more than US$250 million in a new data centre to serve European consumers.
The money to buy Nokia's smartphones and patents will be drawn from the nearly US$70 billion that Microsoft held in overseas accounts as of June 30.
The deal with Nokia represents the second most expensive acquisition in Microsoft's 38-year history, ranking behind a US$8.5 billion purchase of Internet calling and video conferencing service Skype. Tony Bates, who ran Skype, is also regarded as a potential successor to Ballmer.