Say what you will about Steve Ballmer. The man knows how to make an exit. Just days after declaring his imminent retirement, Ballmer has given the go ahead for Microsoft (MSFT) to purchase Nokia’s (NOK) devices and services business along with licenses to Nokia’s patents for about $7.17 billion in cash. The stunner of a deal ends Microsoft’s flirtation with becoming a hardware maker and thrusts it right into the vicious heart of the smartphone and tablet markets.
Microsoft announced the deal late Monday night, saying the boards of both companies had approved the agreement, which is expected to close by the first quarter of next year. Microsoft and Nokia were already the closest of friends, with Nokia standing as the major seller of handsets based on the Windows Phone software. The partnership has not panned out as well as either company hoped: The Windows smartphones hold a tiny fraction of the device market, when compared to products from Apple (AAPL) and those based on Google’s (GOOG) Android software.
With this outright purchase of Nokia, Microsoft looks ready to invest more than ever into hardware. It has been making the Surface tablet—also a disappointment—and will now have an arsenal of Nokia phones, along with tablets Nokia has been developing. Microsoft now becomes a major competitor to its traditional partners such as Hewlett-Packard (HPQ), Dell (DELL), and HTC (2498:TT). The move thus represents a clear break with Microsoft’s partner-first past. “It’s a bold step into the future—a win-win for employees, shareholders and consumers of both companies,” Ballmer said in a statement. “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.”
Stephen Elop has stepped down as Nokia’s chief executive officer to become executive vice president of devices and services at Nokia. A former Microsoft executive, Elop has been mentioned as possible successor to Ballmer, who plans to retire within the next year. Risto Siilasmaa, the chairman of Nokia, has stepped in as interim CEO of Nokia, which will continue to sell networking gear, mapping technology, and intellectual property. “For Nokia, this is an important moment of reinvention and from a position of financial strength, we can build our next chapter,” says Siilasmaa.
The deal says all you need to know about the terror that Apple and Google have struck into the hearts of these two companies. Nokia is a Finnish icon, and exiting the phone and device business in this way is a blow to nothing less than Finland’s national character. (Microsoft, coincidentally, has just agreed to build a $250 million data center in Finland.) For Microsoft, this acquisition represents a desperate and possibly deeply flawed move. It is doubling down on what has been a miserable phone and device union and going against much of its history.
It seems clear enough that Ballmer, Bill Gates, and the rest of Microsoft’s board decided that the time had come to take one giant, radical swing. They’re using overseas cash for the deal, which is a major plus. And Microsoft gets its hands on hundreds of world-class phone and device design experts. Nokia’s smartphones may not sell well, but they look damned good and have some of the most cutting edge technology on the market.
Around 32,000 people will become Microsoft employees when the deal closes, including 4,700 folks from Finland. According to a statement, the businesses Microsoft has bought accounted for $19.7 billion in revenue last year, or about half of Nokia’s total sales. Microsoft gets the Lumia brand for its devices and will license the Nokia brand from Nokia, which gets to keep its brand, which is nice.