Nokia Opens its gates to Microsoft

Salo, Finland which is the one of the heart and soul development facilities for the Nokia Lumia Windows phone, will soon become the home ground for Microsoft. Steve Ballmer seemed pretty excited to have a chance to talk about the very bold and exciting deal transaction that they announced today.

Microsoft is acquiring Nokia's phone business, so called mobile phone business as well as its smart device business. Secondly, along with acquisition of Nokia's phone business, Microsoft has also been assigned the right to Nokia's license, IP license with Qualcomm and other key IP licenses.

Ballmer said they are licensing not buying, ‘we are licensing Nokia's patents to be able to use them not only with our Windows phone and other phone product lines but across the Microsoft product set’. And also mentioned Nokia brings significant expertise in areas such as supply chain and demand planning and has mature operational systems in place that will be a key asset for the combined entities.

They are licensing the ability to use Nokia's HERE mapping geospatial location service to use that and modify it broadly in their products. Nokia Company will continue under the Nokia name. It retains the NSN business which is a network infrastructure business, its location and mapping business, its CTO office and the patent licensing business that goes along with the advanced technology work they are doing.

Nokia ships well over 200 million phones a year, the vast majority of those are mobile or feature phones that get sold for prices as low as say $25 and are often the first connection with technology that people in many places in the world have with any kind of communications or information technology device.

Mr. Ballmer said he is pleased to be acquiring the full capability of Nokia in phones, from mobile phone the smart devices, from engineering, to marketing, manufacturing, supply chain management and the like.

Nokia is a phenomenal company that Microsoft really had a chance to work with and got to know over the last two and half years. They knew the company earlier, but the working partnership has been quite remarkable.

Ballmer pointed out a few key points in his remarks.

We know we need to accelerate. We're not confused about that and we see opportunities to do so. We want to strengthen the overall opportunity for Microsoft from a devices and services perspective and the opportunity for our partners as well.  We are going about why this is a smart acquisition. It is a smart acquisition from a financial and assets perspective.

Today they have the Best Selling Lumia 520 at an entry level price point, the 620, the 720, the 820, the 920 which was voted smartphone of the year by Engadget's readers, the same year the iPhone 5 and Galaxy S3 launched and now the best camera phone in the world, the Lumia 1020. In just over two years, Nokia has gone from shipping no Windows phones to now shipping 7.4 million last quarter.

The Nokia windows phone momentum has made windows phone the fastest growing mobile platform with 78% year-over-year growth. Every quarter for the past eight quarters, more customers have activated windows phones than in the prior quarter. Microsoft is building momentum, but they still have a low share today.

Nokia's mobile phone division reaches a whole new customer segment from Microsoft shipping over 53 million phones last quarter. Terry Myerson, Executive Vice President, Operating Systems said, ‘We are excited to partner with this team to bring the next billion people on to the Internet. In the area of imaging, the Lumia 1020 has no equal’.

Some Financial Aspects of the Acquisition Deal:

First, Microsoft is paying €3.79 billion for Nokia's devices and services business, which includes thousands of design patents, key brands. Additionally €1.65 billion is being paid to license Nokia's broad intellectual property portfolio for 10 years with an option to convert to a perpetual license.

Microsoft expects this deal to have a negative $0.08 impact on adjusted basis and a $0.12 impact to GAAP earnings per share in fiscal 2014 based on the close date in early calendar 2014. The smartphone market is expected to reach over 1.7 billion units a year.

By owning the devices and services business, Microsoft will now be able to capture and utilize the entire growth profit of the device, which for Lumia was about $3 per unit in Nokia's most recent quarter. Using assumptions that are in line with industry forecast and current performance and trajectory, after it is integrated into Microsoft, we estimate that they will achieve operating income break even for this business when they sell approximately 50 million smart devices a year.

Nokia sold over 53 million mobile phone units in their second quarter and their strength in growth markets creates a unique opportunity for Microsoft to reach these users as they transition to smartphones.

Mr. Ballmer ended his speech saying, ‘The Lumia Windows phones in the market are some of the best products Microsoft has ever built in terms of capability, design, quality. We are very, very firm in our commitment and belief’.

So one of the things which I think we are more sort of acutely focusing on is, how do companies really make big acquisitions work? Only time can tell. And since we all know that Steve Ballmer is retiring, I personally feel he is going to be remembered for this acquisition along with numerous feathers on his hat. Wish him Luck.