Microsoft announced on Monday that it will acquire Nokia's devices and services unit in a bid to accelerate the software giant's Windows ecosystem.
The deal is set to go ahead for about $5 billion (€3.79bn), with an additional $2.17 billion (€1.65bn) to be spent on licensing Nokia's patents.
The boards of both companies agreed to the transaction, which will see the Redmond, Washington-based software giant purchase the Espoo, Finland-based company's phone making unit and patents, and license and use its mapping services.
The news comes a few weeks after a Wall Street Journal report claimed that Microsoft was looking to buy Nokia, but discussions broke down.
The agreement will see Microsoft becoming a fully fledged phone maker, years after it evolved its Windows Mobile platform into Windows Phone.
Microsoft said in a lengthy statement that it will draw in overseas cash to fund the transaction. The deal is expected to complete around the first quarter of 2014, and will be subject to approval by the shareholders of both companies.
U.S. and EU regulators will likely require the approval of the acquisition.
Microsoft chief executive Steve Ballmer, who announced his retirement in August, called the deal a "win-win" for employees, shareholders, and consumers of both companies. Nokia chief executive Stephen Elop, a former Microsoft executive who joined the phone maker in 2010, said that the partnered companies will now be able to "bring the best" of both firms.
Elop will also be coming back to Microsoft, Ballmer wrote in an email to staff. He will lead the new Microsoft-owned phone making division, and report directly to Ballmer. Other executives will join Elop at Microsoft, including smart devices chief Jo Harlow, operations boss Juha Putkiranta, feature phones director Timo Toikkanen, design leader Stefan Pannenbecker, and sales and marketing vice president Chris Weber.
In a TechNet blog post published at 6am Helsinki time, both chief executives said: "For Microsoft as well, today is a bold step into the future, a huge leap forward on our journey of creating a family of devices and services that delight people and empower businesses of all sizes."
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Under the terms of the deal, Microsoft will acquire around 32,000 Nokia employees, including 4,700 people in Finland and 18,300 employees directly involved in the manufacture, assembly, and production of devices worldwide. Nokia will also assign its long-term patent licensing agreement with Qualcomm, a smartphone chip maker, and licensing agreements to Microsoft as part of the deal.
Microsoft will absorb the company's smart devices unit, which develops the Lumia line-up of smartphones, allowing Microsoft to directly control both the hardware and software ecosystem.
BlackBerry, one of the remaining smartphone makers in control of its own ecosystem outside of the Apple and Google duopoly, is currently undergoing an internal review in efforts to attract a buyer or split up, and will face its toughest challenge ahead with the Microsoft-Nokia deal.
"We will continue to build the mobile phones you've come to love, while investing in the future — new phones and services that combine the best of Microsoft and the best of Nokia," Ballmer and Elop wrote.