Microsoft's Nokia acquisition: It was 'double down or quit'

Summary:In many respects, the Microsoft-Nokia deal rhymes with Google's Motorola purchase. The difference: Nokia controlled so much Windows Phone distribution that Microsoft had to buy it.

Microsoft's Nokia purchase price can be justified on intellectual patents and an integrated device strategy---much like Google's acquisition of Motorola Mobility could---but the software giant really had no choice. Nokia was the dominant Windows Phone distributor and Microsoft had to buy it to be a device player.

The companies announced a deal where Microsoft will buy Nokia's device business for EUR 5.44 billion. Microsoft pays for the deal with its offshore cash hoard. The deal, which is expected to close in the first quarter, is---and isn't surprising.

On the surface you have to wonder why Microsoft would get into a low-margin hardware business and buy a company that's struggling. But then reality hits you: Microsoft had no choice. Microsoft could double down on mobile or quit. Microsoft chose to double down just like it always does. The company has also doubled down on search with mixed results at best.

Global coverage:  Nokia Interim CEO: Microsoft deal makes us stronger  |  Even with Nokia devices, Microsoft wants to license Windows Phone to other makers  |  Does its Nokia buy thwart or fuel a possible Microsoft break-up?  |  Microsoft shows how to flush decades of Nokia goodwill away  |  Microsoft gets less than $10 per Windows Phone unit  |  Microsoft-Nokia deal: Reaction from the Twitter trenches  |  Elop drops Nokia CEO role to lead devices team under Microsoft deal  |  Microsoft-Nokia deal: 11 quick facts  |  Microsoft to buy Nokia's devices, services unit for $7.2B

What's also clear is whether Microsoft CEO Steve Ballmer just gave his successor another headache. Time will tell on that one.

In many respects, the Microsoft-Nokia deal rhymes with Google's Motorola purchase . Both companies want end-to-end devices. Both companies want to push services. Both companies risk alienating partners. And both companies got intellectual property.

Here's the difference. Google didn't have to buy Motorola, but did for the patents and a yet-to-be-seen device strategy. Moto X is the first volley at best. Microsoft had little choice. Nokia controlled Windows Phone distribution and the companies were so integrated they might as well be one unit. With Nokia, Microsoft can now put Windows Phone on low-end devices to gain share. Nokia kept Windows Phone as a high-end OS.

Jefferies analyst Lee Simpson said:

Microsoft was the only possible buyer of this division although it never appeared clear to us that this was a deal that had to happen; but with sub-5% market share in smartphones for its windows phone OS, the choice for Microsoft was “double-or-quits” in mobile. The OS provider will continue to license its WP8 to other parties but many will expect Microsoft/Nokia to continue to dominate the ecosystem.

Oppenheimer analyst Shaul Eyal said:

With the acquisition of Nokia's device and services unit Microsoft is placing a final bet on its mobile
opportunity. While the transaction does not come as a full surprise it does remove an uncertainty enabling investors to weigh the chance of getting it right this time. We view the transaction as a Microsoft call option on mobile, whereby some positive reward could be reaped from the money entered. If the option expires then (hopefully) not too much damage will have been done.

Ballmer and Stephen Elop, Nokia CEO who now rejoins Microsoft and loses a title (for now), said in an open letter.

nokia0905ballmerelop-v1-620x413

 

Nokia and Microsoft have always dreamed big – we dreamed of putting a computer on every desk, and a mobile phone in every pocket, and we’ve come a long way toward realizing those dreams.

It remains to be seen whether Nokia becomes a nightmare, but at least Microsoft didn't break the bank. Most analysts say Microsoft paid fair value for Nokia, which gets to focus on its network business and lands cash.

Barclays analyst Andrew Gardiner outlines what Nokia gets. Simply put, Nokia gets focus and value it wouldn't have received from devices anyway.

nokvalueparts

 

Topics: Microsoft, Mobility, Nokia, Smartphones, Windows Phone

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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