Ballmer: Nokia Deal Accelerates Share Position
http://www.bloomberg.com/news/2013-09-03/microsoft-to-buy-nokia-s-devices-business-for-5-44-billion-euros.html
Microsoft Corp. (MSFT) is spending 5.44 billion euros ($7.2 billion) to buy
Nokia Oyj (NOK1V)’s handset unit so it can gain ground on Apple Inc. and
Google (GOOG) Inc. in a smartphone market it let get away -- gaining a possible new chief executive officer in the process.
Nokia’s devices and services unit, which accounted for half of the
company’s 2012 revenue, along with 32,000 employees, will transfer to
Microsoft, the companies said. Nokia CEO Stephen Elop, 49, will return
to Microsoft after a three-year stint running the Finnish manufacturer.
The move stoked speculation he may be a successor to CEO
Steve Ballmer, who said last month he’d retire within 12 months.
Microsoft
is deepening a push into hardware as dwindling computer sales sap
demand for the programs that made it the world’s largest software maker.
Nokia shares jumped as much as 48 percent in Helsinki as the sale
removes a money-losing handset business and lets it focus on
higher-margin networking gear. Even combined, the companies have less
than 4 percent of the smartphone market, leaving them far behind Apple
and Google.
“The question is whether combining two weak companies
will get you a strong new competitor -- it’s doubtful,” said Paul
Budde, a telecommunications consultant in Sydney. “Both Nokia and
Microsoft really missed the boat in terms of smartphones, and it is
extremely difficult to claw your way back from that.”
Market-Share Decline
Nokia, based in Espoo,
Finland,
racked up losses of more than 5 billion euros over nine quarters as
Elop’s comeback efforts failed to eat into the dominance of
Apple (AAPL)
and Google’s Android platform in the smartphone market. The stock has
lost more than 80 percent in the five years through yesterday.
The
shares rose 34 percent to 3.97 euros in Helsinki, valuing Nokia at 14.9
billion euros. The shares of Redmond, Washington-based Microsoft fell
4.6 percent to $31.88 at the close in New York, wiping out more than
$12.6 billion in market value. The company’s
market capitalization is now about $265.6 billion.
As
part of the agreement, Microsoft will pay 3.79 billion euros for
Nokia’s devices division and 1.65 billion euros for patents, according
to a statement from the companies. The all-cash transaction, subject to
Nokia investors’ approval, is expected to be completed in the first
quarter of 2014. JPMorgan Chase & Co. advised Nokia on the
transaction, while Goldman Sachs Group Inc. worked with Microsoft.
‘Big Transformation’
Nokia
said it will book a gain of 3.2 billion euros, with the sale
“significantly” accretive to earnings. It also said it aims to return
its debt, which is ranked junk by all three major rating companies, to
an investment grade. Chairman Risto Siilasmaa, who will become Nokia’s
interim CEO, said the company may return excess capital to shareholders.
“It’s a big transformation, but that’s what you’ve got to do in the tech business to move forward,” Ballmer told
Tom Keene on Bloomberg Television’s “The Pulse.”
Microsoft
said it is confident of getting the deal approved by early next year.
The transaction will shave 12 cents a share off earnings in the current
fiscal year, or 8 cents excluding some items, the company said. In 2015,
the cost will be 6 cents based on generally accepted accounting
principles. Excluding some costs, the deal will add to profit that year.
Microsoft also expects to get more profit for every device sold
-- more than $40 a unit for smartphones, compared with the less than $10
in gross profit it currently gets for Windows Phone sold by Nokia. That
doesn’t include the costs of marketing and development, though.
Cost Savings
Based
on generally accepted accounting principles, the transaction will add
to earnings in fiscal 2016, Microsoft said. The company expects to have
annual cost savings of $600 million 18 months after the deal closes.
The
Microsoft purchase was the second major deal to be announced during the
U.S. Labor Day holiday yesterday. Verizon Communications Inc. agreed to
pay $130 billion for Vodafone Group Plc’s stake in their U.S. wireless
venture in the biggest transaction in more than a decade.
The
Microsoft-Nokia deal is the largest for a wireless device maker after
Google’s purchase of Motorola’s handset unit in 2012, according to data
compiled by Bloomberg. For Microsoft, the deal including the payment to
license Nokia’s patents is its second-biggest behind the $8.5 billion
purchase of Internet telephone company Skype in 2011.
Motorola Comparison
Microsoft
agreed to pay about 0.35 times annual revenue, compared with the median
of about 1.4 times for 60 wireless equipment-maker deals tracked by
Bloomberg. That also compares with the 0.77 times revenue Google paid
for Motorola Mobility, the data show.
Google paid about 1.3 times
annual operating income for the handset maker, while Nokia’s device and
services business reported an operating loss last year, according to
the data.
With the latest sale, the original pioneers in the
mobile-phone industry -- Motorola, Nokia and Ericsson AB -- have all
ceased to be independent handset manufacturers or given up on the
business. BlackBerry Ltd. said last month it’s considering putting
itself up for sale. Its shares advanced less than 1 percent to $10.21 in
today’s trading.
Microsoft, meanwhile, becomes the last major
developer of smartphone operating systems to get into manufacturing.
Apple makes its own handsets, which use its iOS operating system.
Google’s acquisition of Motorola Mobility gave it its own lineup of
phones.
Surface Tablet
Microsoft’s other recent
significant move into hardware -- the Surface tablet -- has trailed
expectations and the company wrote down inventory last quarter.
To
break even on an operating basis, Microsoft will need Nokia to sell
about 50 million smartphones a year, it said in a presentation. Nokia
has a run-rate of about 30 million units. In the second quarter, Nokia
sold 7.4 million smartphones under the Lumia line.
Microsoft
acquired the Lumia brand to use with smartphones, while it will license
the Nokia brand to use with low-end phones for 10 years, Elop said at a
press briefing today. Microsoft will later decide what to call its
future smartphones.
Microsoft will face a balancing act owning Nokia and keeping its other hardware partners, including
HTC Corp. (2498)
and Samsung Electronics Co., committed to its Windows Phone. Aiming to
reassure other phone makers that Microsoft will still support them,
Ballmer said that the company was “100 percent” committed to helping its
manufacturing partners.
Ballmer declined to say whether Elop would become CEO, or had been a candidate to succeed him.
Microsoft Tie-Up
Ballmer
called Nokia’s Siilasmaa shortly after the new year to initiate
discussions on an acquisition and the two met in February at the
Mobile World Congress
in Barcelona, according to Microsoft. Talks heated up in recent months
and a deal was lined up before Ballmer announced his retirement last
month, the company said.
Microsoft and Nokia have had a close
relationship through Elop, who had run Microsoft’s Office unit. He left
the software maker in September 2010 to take the top job at Nokia.
At
the time, Elop likened Nokia’s position to a man standing on a burning
oil platform on the verge of being engulfed in flames, facing the option
of staying aboard or jumping to the ocean to have a chance to survive.
In
February 2011, Elop struck a deal with Ballmer to switch Nokia’s
smartphones from its own Symbian operating system to Windows Phone. In
exchange, Microsoft ponied up more than $1 billion to pay for Nokia
marketing and developing products on Windows.
Losing Share
Nokia had the largest share of the mobile phone handset market until it was overtaken by
Samsung (005930) in 2012, according to data compiled by Bloomberg.
Still,
Nokia remains a top seller of traditional mobile phones -- models that
are more popular in developing markets. In total shipments, the company
ranks second to Samsung among device manufacturers. Samsung accounted
for 26 percent of shipments last quarter, while Nokia had 14 percent.
Apple came in third with 7.2 percent.
After the sale to Microsoft, Nokia’s biggest business will be network equipment, which it recently fully took over from
Siemens AG (SIE)
and renamed Nokia Solutions and Networks. The unit competes with
Ericsson, Alcatel-Lucent as well as China’s Huawei Technologies Co. and
ZTE Corp. (763)
Ericsson jumped 5 percent to 82.50 kronor in
Stockholm.
Alcatel-Lucent, which under new CEO Michel Combes is streamlining its
business, added 9.2 percent to 2.20 euros in Paris trading.
Mapping Unit
Nokia
said it will also keep its mapping and location services unit, called
Here, and its technology development and licensing division.
“Nokia
has a highly evolved device design and manufacturing process which will
benefit Microsoft greatly,” said Al Hilwa, an analyst at research firm
IDC. “This is simply the fastest path in front of Microsoft to achieve
something like Apple’s vision on devices.”
Contributed by Bloomberg
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