Microsoft In $7 Billion Deal for Nokia’s Cellphone Business

Microsoft (MSFT) certainly isn’t doing anything to discourage rumors that Nokia chief Stephen Elop is first in line to replace retiring honcho Steve Ballmer. In fact, the vendor just plunked down $7 billion worth of reasons that Elop soon will step into Ballmer’s shoes, buying Nokia’s cellphone business in a move that gives it instant heft to duel Samsung and Apple (APPL) in the mobile market.

The two companies announced a deal late Monday in which Microsoft will pay $3.79 billion euros, or about $5 billion, for Nokia—including its smartphone operations—and $1.65 billion euros, or about $2.18 billion for the Finnish company’s patents. The total transaction, which gains Microsoft “substantially all of Nokia’s Devices & Services business, licenses to Nokia’s patents, and license and use of Nokia’s mapping services,” amounts to $5.44 billion euros or $7.18 billion.

Tied to the agreement is Elop and a number of other key Nokia execs—namely Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber—joining Microsoft. Elop is relinquishing his post as Nokia chief executive to become Microsoft’s devices and services executive vice president.

“Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing and manufacturing,” Elop said.

In total, about 32,000 Nokia employees are expected to transfer to Microsoft, including 4,700 people in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide.

Microsoft said it will tap its overseas-stored cash to fund the transaction, which is expected to close in the first quarter of 2014.

“It’s a bold step into the future—a win-win for employees, shareholders and consumers of both companies,” said Ballmer. “Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.”

The purchase makes it clear that Microsoft believes it cannot seriously challenge Samsung and Apple on its own, nor can it leave its fate largely in the hands of Nokia, which has committed to the Windows Phone platform but has only lukewarm results to show for it. And, moreover, the deal is a tacit admission on Microsoft’s part that it needs a seasoned hand to run its mobile business.

For sure, Microsoft had to be emboldened by researcher Gartner’s recent Q2 2013 smartphone OS figures that showed it vaulting ahead of BlackBerry (BBRY) into the third spot worldwide with 3.3 percent of the market, but still a far cry from Android’s 79.2 percent and not really in hailing distance of Apple’s iOS at 14.2 percent.

In acquiring Nokia’s Smart Devices business unit, Microsoft will take control of the Lumia smartphone line, which achieved some 7.4 million units in sales in Q2 2013. The purchase also lands Microsoft Nokia’s Mobile Phones business unit, which had sales of 53.7 million units in Q2 2013.

Under terms of the deal, Nokia will continue to own and manage the Nokia brand, will retain its patent portfolio and will grant Microsoft a 10-year license to its patents.

Microsoft also said it will open a new data center in Finland and will invest more than $250 million in capital and operation of the new facility in the next few years.

“For Nokia, this is an important moment of reinvention and from a position of financial strength, we can build our next chapter,” said Risto Siilasmaa, Nokia board chairman and interim chief executive. “After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders.”