Microsoft doubles down on devices with Nokia

MarketWatchSeptember 4, 2013 

Microsoft Nokia

A Nokia phone that runs Microsoft Windows software is displayed in a mobile phone store Tuesday in New York. Microsoft Corp. announced Monday that the company is buying Nokia Corp.'s line-up of smart phones and a portfolio of patents and services in an attempt to mount a more formidable challenge to Apple Inc. and Google Inc. as more technological tasks get done on mobile devices instead of personal computers.SETH WENIG/Associated Press

SETH WENIG — AP

SAN FRANCISCO -- Microsoft Corp. CEO Steve Ballmer on Tuesday touted the company's $7.2 billion acquisition of Nokia Corp.'s wireless device business, saying the deal ensures future access to Windows Phone hardware.

Analysts see the deal as the software giant "doubling down" on its bet on devices, following initial forays into phones and tablets that have yet to meet with success.

The deal would be the company's second-largest acquisition on record following its $8.5 billion buyout of Skype in 2011.

In a conference call Tuesday, Ballmer touted the acquisition of Nokia's device business, which was announced Monday evening. The deal will give Microsoft ownership of its own line of smartphones and other mobile devices. The company hopes that will extend the reach of its core Windows franchise, which still rules desktop computing but has seen limited traction in the mobile market.

It also brings Microsoft more than 30,000 new employees, along with some of Nokia's manufacturing facilities and access to a broad array of patents under a licensing deal. Nokia has been building smartphones for Microsoft's Windows Phone operating system for the past two years -- though Windows Phone still ranks as a distant third to the popular iPhone and Android platforms.

"We think we have made excellent, excellent progress with the partnership, and yet we also know we have a long way go and felt in balance that, together, this is the best approach for both companies' shareholders,"

Ballmer said on the call.

The move comes as Microsoft is undergoing a major re-alignment, both in its top management ranks as well as the organization of the entire company, which has previously been focused on growing its lucrative Windows and Office businesses.

In mid-July, Ballmer announced a wide restructuring of the company, designed to emphasize a unified experience across services and devices. He then surprised investors less than two weeks ago by announcing his own plan to retire from the company within a year -- once a replacement is found.

Some analysts noted that the Nokia deal essentially locks Microsoft into pursuing the device strategy -- even if the new CEO would prefer another approach. The company also just reached an agreement with ValueAct Capital, an activist fund, last week. Microsoft said Tuesday that ValueAct was not informed of the talks with Nokia.

"Increasing the cost structure and commitment to a strategic direction in devices that new management may not wish to pursue creates lots of issues," Rick Sherlund of Nomura wrote in a report to clients on Tuesday morning, adding that the "decision to push forward with the Nokia acquisition despite the search for a new CEO is likely a source of frustration to many shareholders and to ValueAct."

Ballmer noted that the two companies were facing a "recommitment date" next year to re-evaluate their deal. Since Nokia accounts for more than 80 percent of the Windows Phone devices sold, Ballmer said he felt the need to ensure access to devices made for the operating system, as opposed to simply making its apps available on the other platforms.

"We are not holding back services from other phone vendors' platforms in any way. On the other hand, we cannot do a full and first class experience on those platforms," Ballmer said, adding that "we run the risk that Google or Apple will foreclose our ability to integrate, to do distribution or to impose on their economic turf."

Analysts took a mixed view on the deal, with many noting Microsoft's big challenges in driving growth of its platforms over mobile devices.

"We believe shares ofMicrosoft are driven by the growth prospects of itsWindows franchise and its ability to stay relevant inthe post-PC era," Yun Kimof Janney Capital wrotein an early note to clients, adding that "we do not believe the planned acquisition of Nokia's mobile business changes its strategic positioning in the smartphone market."

Walter Pritchard of Citigroup said the deal should kill off previous speculation that Microsoft may split its consumer and enterprise businesses.

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