ANALYSIS OF

MICROSOFTS
ACQUISITION OF NOKIA
Submitted By
Abhishek K. Mishra 2013PGP002
Dipak Senapati 2013PGP018
Gaurav Kala 2013PGP019
Manoranjan 2013PGP033

Table of Contents
INTRODUCTION....................................................................................................... 2
ABOUT MICROSOFT AND ITS BUSINESS DESCRIPTION ...................................2
ABOUT NOKIA AND ITS BUSINESS DESCRIPTION.............................................2
INTRODUCTION OF THE MICROSOFT-NOKIA MERGER ...................................3
SWOT ANALYSIS OF MICROSOFT...........................................................................4
SWOT ANALYSIS OF NOKIA.................................................................................... 5
BCG MATRIX FOR MICROSOFT..............................................................................6
ATTEMPT TO CONVERT QUESTION MARK INTO STAR ....................................6
MANAGEMENT ANALYSIS....................................................................................... 7
FINANCIAL ANALYSIS............................................................................................. 7
MARKET AND INVESTORS SENTIMENTS............................................................9
RATIONALE BEHIND THE ACQUISITION.............................................................10
MICROSOFTS UNSUCCESSFUL STINT IN MOBILE DEVICES .........................10
LEVERAGING THE BRAND IN MOBILE DEVICES KEEPING OUT OEMS ........11
VERTICAL INTEGRATION WILL IMPROVE PROFIT MARGINS ......................11
FUTURE MARKETING & BRANDING ISSUES.......................................................11
FUTURE TECHNOLOGY AND R&D ISSUES...........................................................12
LIST OF FIGURES................................................................................................... 13
REFERENCES.......................................................................................................... 15

INTRODUCTION

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ABOUT MICROSOFT AND ITS BUSINESS DESCRIPTION

Microsoft Corporation is engaged in the development and marketing of software, services, and hardware
devices. Apart from developing and licensing a range of software products and services, the company also
designs hardware devices and delivers online advertising services. In addition, Microsoft provides
consulting, product and solution support services, and also trains and certifies computer system
integrators and developers.
Microsoft's operations span across five business divisions: Microsoft business division, server and tools,
Windows division, entertainment and devices division, and online services division. In July 2013,
Microsoft realigned its organizational structure as part of its transformation to a devices and services
company. Under the new structure, the company operates through five segments: devices and consumer
(D&C) licensing; D&C hardware; D&C other; commercial licensing; and commercial other.

ABOUT NOKIA AND ITS BUSINESS DESCRIPTION

Nokia Corporation is a provider of telecommunications network infrastructure, location-based
technologies and advanced technologies. The company has operations across North America, Europe and
Asia. It is headquartered in Espoo, Finland. Nokia Corporation provides network infrastructure to the
telecommunication industry. The company also offers location intelligence solutions and advanced
technology development and licensing. Nokia has global presence with operations, and research and
development (R&D) facilities in Europe, North America and Asia, and sales in approximately 130
countries.
The company operates through three businesses: networks, HERE and technologies. Networks segment
(formerly Nokia Solutions and Networks) offers telecommunications infrastructure that focuses on the
mobile broadband market. The networks business is further organized as two business units: global
services and mobile broadband. Nokias network planning and optimization business offers network
assessment and capacity and configuration planning. The company offers these services through two
global delivery centres and five global service delivery hubs around the world. Nokias HERE business is
engaged in location intelligence business that delivers maps, a location platform, and location experiences
across multiple screens and operating systems. The companys technologies business is engaged in
technology development and licensing. It manages a portfolio of approximately 10,000 patent families
comprising of around 30,000 individual patents and patent applications

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INTRODUCTION OF THE MICROSOFT-NOKIA MERGER

Microsoft recently acquired Nokia to leverage its position in the smartphone market. On April 25, 2014,
Microsofts essential acquisition of Nokias handset business was finalized after a seven-month-long
process. The former smart phone company Nokia will now be incorporated as a subsidiary of Microsoft
and renamed Microsoft Mobile, according to the report. Taking cue from this deal, current leaders in
smartphone market Apple and Samsung will have a new competitor to look out for in the future.
Microsoft initially announced the merger in September of 2013, and after going through some legal
hurdles in Nokias Asian markets, the deal was finalized. Microsoft purchased Nokias smartphone
business for 3.79 billion euros ($5 billion) as well as the companys existing patents for an additional 1.65
billion euros ($2.18 billion) for a grand total of about $7.2 billion.
Earlier CEO of Microsoft Steve Ballmer described this merger as bold step into the future and a winwin situation for shareholders, employees and customers of both companies. This deal can be described as
the merger of best of Microsofts software engineering with the best of Nokias hardware engineering.
This move by both the companies is not much of a surprise as both the companies had already established
business relationship with each other. They have worked closely to produce Nokia Lumia smartphones
(They run windows OS).
In this report deal has been analyzed in a step wise manner. Initially SWOT analysis of both the
companies is discussed. Then this report has tried to figure out, how these capabilities and weakness have
been used for the merger. It also discusses management analysis to see the rationale of the management
behind the acquisition and critically evaluates the judgment of the management. Financial analysis of the
deal was carried out to see the monetary benefits of the deal for both the companies (Microsoft
specifically).
Report has tried to figure out the future of this acquisition by carrying out in-depth analysis of the market,
investors and customer sentiments after the merger. This report also analyzed the technological and R&D
issues that merger may face in future. Future marketing and branding initiative that may evolve in future
have also been discussed. Please refer the below diagram for the step wise approach for the analysis of the
merger.
Process Flow for analysis of Microsoft-Nokia Merger

Analysis
and
strategic
rationale
SWOT Management
Analysis
Financial
of Microsoft
analysis
and
of
Nokia
the deal
Future
as well
Issues
asfor
understanding
as acquisiton
a result of Merger
market(Marketing
and investor
andsentime
Brandi

SWOT ANALYSIS OF MICROSOFT

Strengths

Robust presence across the software

and hardware landscape
Strong Distribution Channel
Strong R&D capabilities driving
organic growth
Strong financial performance
Brand Loyalty and Brand reputation

Weaknesses

Oppotunities

Cloud based services

Growing application servers market
Mobile advertising
Growing Mobile devices Industry

Poor acquisitions and investments:

Dependence
on
hardware
manufacturers:
Criticism over security flaws
Mature PC markets
Slow to innovate

Threats

Intense competition in software

products
Changing consumer needs and
habits
Open source projects
Potential lawsuits

Note: The SWOT analysis has been done without taking into the account of the Acquisition

As we see that one of the Microsofts weaknesses lie in over dependence on hardware manufacturers or
OEMs, it would naturally point to the direction of building hardware capabilities and vertically
integrating through organic methods or through acquisitions. Also with the pace of technological
advancement and market growth of mobile devices, the time seems appropriate to enter into mobile
devices with an established and trustworthy brand. The threats in Microsofts traditional software business
seem to be manifold including the maturity of the market as well as availability of opens source software

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and platforms. Hence, Microsofts diversification and increasing focus on hardware to promote its
software and increase the installed base seems to be strategically right.
SWOT ANALYSIS OF NOKIA

Strengths

Well established networks business

Robust patent portfolio to drive future
growth
Diversified geographic presence
Strong brand awareness across the globe
High reputation of industrial hardware
design, build quality and voice quality
High Levels of Brand Loyalty

Weaknesses

any more, but Nokia still heavily relies

on it

Oppotunities

Rising demand for high-bandwidth

mobile communications
Strong outlook for connected and smart
vehicles market
Nokias expanded partnership with
Juniper

Declining Top-Line Performance

Inward-looking and short-sighted vision
Failure
to
establish
effective
communications between teams
Long product development cycles and
long time-to-market
Symbian cannot fulfil customer needs

Threats

Intense
competition
in
the
telecommunications
infrastructure
market
Operating in highly regulated markets
could impact growth
Foreign exchange risk

Nokia had declining top line performance over the last few years. It failed to respond to the market needs
and trends and struck to its platform till it was too late to jump the bandwagon. It had long product
development cycle and time to market for new smartphones with emerging platforms. The opportunity
was quickly grabbed by likes of Samsung which used the android platform to build a series of
smartphones and gain the early mover advantage. There are a number of other brands in smartphones who

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saw opportunity and utilized the open source platform to build a range of phones in different price
buckets. Apart from the competition, Nokia faced other risks like fluctuations in foreign exchange due to
global presence with its financials already in strain. Adding up all these scenarios, the growth opportunity
for Nokia was limited with a few segments like high-bandwidth mobile communication and smart vehicle
market. The opportunities could be harnessed well with an umbrella cover of a financially strong brand
with high reputation. This seemed strategically right to be acquired by such a brand as Microsoft and
Nokia could gain from the deal.
BCG MATRIX FOR MICROSOFT

ATTEMPT TO CONVERT QUESTION MARK INTO STAR

Windows 8 mobile platform has great potential and serves as question mark for Microsoft in BCG matrix.
Microsoft is not able to gain market share in windows mobile as mobile computing demand has
traditionally been OEM centric and based on perception. So every new player faces difficulty to build
market share in the competitive environment. Nevertheless Microsoft can gain on its OS and platform
knowledge and use windows for mobile devices to slowly increase market share. What it already has, is
the OS and platform and only needed a brand in OEM that would vertically integrate its system and
complete the value chain to market the whole bundle of hardware with OS. Acquisition of Nokia is a step

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in this direction as Nokia was going through a financial trouble and was a target for acquisition and it had
vast experience of hardware design with a number of patents and intellectual property.

MANAGEMENT ANALYSIS

Nokia relies on a strong corporate culture and the companys value. It has been ingrained into the
organisation. Customer satisfaction, respect for the individual, achievement and pedagogical value based
leadership has been integral element of the Nokias culture. Nokia has relied on strong research and
development and entrepreneurial spirit of its employees. It had a flat organisational structure which
allowed it to be flexible and fast in decision making. This seems to be in fit with the philosophy and
culture of Microsoft. Although it is a matter of contention whether the corporate culture of Microsoft will
have any adverse effect on Nokia in future with the possible changes in structure and leadership.
There has also been a shift in the focus towards more tech savvy management at Microsoft and the
business at Microsoft has been changing. After the acquisition of Nokias handset division, Microsoft has
been making management and leadership changes. Satya Nadella was made the CEO of Microsoft and
then Nokias former head Stephen Elop was given full control over the devices division of Microsoft to
strategically integrate the processes in the two companies. The CEO named a chief strategy officer and
disclosed the exits of several top executives. Nadella, who was promoted to replace Steve Ballmer, is
lining up his leadership team as he seeks growth in devices and cloud services. Nadella is also replacing
executives whove left after Ballmers management overhaul. The changes in management may have a
positive effect on the integration of Nokias organisation structure with Microsoft in future. The acquired
organisation has to have a similar structure in the long run to help successful integration to reap maximum
benefits out of this deal.
FINANCIAL ANALYSIS

Microsoft paid around 3.79 billion Euros to purchase Nokias device and services business and 1.65
billion euros to license Nokias patents. Microsoft also offered Nokia a credit of 1.5 billion Euros. From
the financial perspective, Deal has helped Microsoft in following ways:

Deal has helped Microsoft in acquiring a high gross margin business of Smart device and services
( >$40 per unit) which is significantly higher than past partnership through which Microsoft used

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to earn royalty on Windows phone( $10 per unit) This will help Microsoft in pushing its
Entertainment and Devices division at high profitability levels for the first time.

Microsoft expect to generate annual cost synergies of $600 million within 18 months after deal
closure. Microsoft predicted that the purchase will reduce the FY-14 Earnings per share by $0.12,
will again reduce by $ 6 in FY-15 and will improve earnings per share by $0.04 in fiscal 2016
(GAAP EPS). This is based on an assumption that Microsoft will integrate the new units very
well and future product launches will be received well by the public.( Refer-Fig 1)

Microsoft's has a US Cash surplus including liquid cash and short-term investment. Microsoft
pays its dividends using this cash. This deal uses offshore cash pile and this does not impact the
ability of Microsoft to return capital to US shareholders.

As per Nokias Income statement, sales of Q1, Q2 and Q3 totaled around 17.2 billion euro out of
which 8.51 billion euro came from Devices and services division (49.5%). So Microsoft has been
benefited by this deal by purchasing assets that account for 50% of sales.

This deal will improve unit gross economics as described above by the increase in gross margin
and provide long term value creation fueled by growth in smartphone business. At assumed
operating margin of 5% Microsoft estimated the net present value of deal to be $15 billion and at
10%, the value is doubled to $30 billion. Refer Table-1 and Table-2 for more details.
Table-1: Smartphone Revenue Opportunity
Smartphone Revenue Opportunity
2018 Worldwide Smartphone demand
1.7 billion
Assumed market share

15%

Annual Revenue

$45 billion

Table 2: Long Term Value because of Merger

Long term Value Creation: NPV
Assumed Operating margin
5%
10%
Annual Operating Income
$2.3 billion
$4.5 billion

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NPV

$15 billion

$30 billion

Three levers of the Microsoft Nokia Deal for better unit economics driven profitability

Increasing
further unit
growth and
market share
Improved per unit
Economics by
increasing gross
margins dollars and
overall synergies

MARKET AND INVESTORS SENTIMENTS

Initially Microsoft investors showed unhappiness after the announcement of deal resulting in stock prices
going down by 4.6% to $31.88, which led to elimination of $13 billion of market value. However Nokia
investors welcomed the deal resulting in stock prices of Nokia surging by more than 40%. (Refer-Fig 2
and Fig 3) Investors believed that ownership of Microsoft would not change the sales of windows phone,
but would decrease them as it prompts other Original equipment manufacturers to give up on it entirely.
We believe that this deal was in favor of the US investors at Microsoft as the US cash pile was not used
for the deal and hence did not hamper the ability of Microsoft to provide return in form of dividends to
shareholders. Also as described by Microsoft in their rationale for acquisition, this deal creates long
term value to investors of around $30 billion, assuming 10% operating margins.

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RATIONALE BEHIND THE ACQUISITION

Microsoft has suffered similar problems to Nokia; it once held monopolist control over the PC market,
and its operating systems are still ubiquitous. Despite strong revenues from its Windows OS, Office suite
of business software and Xbox game console, the companys mobile phone unit and tablets have not been
successful. The trends show that the technology evolution has made the computers ubiquitous and soon
will transform computing to purely mobile from the traditional. If Microsoft had to align with the current
trends, it needed strong devices knowledge as well as market share. Microsoft saw a chance of that in
Nokia and strategically decided to consider a buyout. Nokia has traditionally been good at mobile handset
designs and technology till it lost the battle of OS to android which changed the mobile market scenario.
MICROSOFTS UNSUCCESSFUL STINT IN MOBILE DEVICES

Microsoft has enjoyed a considerable success in the desktop and business software industry, and has
consistently grown its revenues. However, the desktop market is declining, which has made the company
think seriously about its long-term future. The explosive growth of the tablet and smartphone market is
something the company attempted to capitalize on, but unfortunately it has not been able to quite compete
with the likes of Apple and Samsung in the mobile devices design. (Refer-Fig 4 for Technology-S curve)
Table 3: Worldwide Device Shipments by Segment (Thousands of Units)
Device Type
Traditional PCs (Desk-Based and
Notebook)
Ultra mobiles, Premium
PC Market Total
Tablets
Mobile Phones
Other Ultra mobiles (Hybrid and
Clamshell)
Total

2013

2014

2015

296,131

276,221

261,657

21,517

32,251

55,032

317,648
206,807

308,472
256,308

316,689
320,964

1,806,964

1,862,766

1,946,456

2,981

5,381

7,645

2,334,400

2,432,927

2,591,753

Source: Gartner (June 2014)

LEVERAGING THE BRAND IN MOBILE DEVICES KEEPING OUT OEMS

Compared to its competitors, Microsoft systems are usually adopted by original equipment manufacturers
(OEM), preinstalling it on their devices. In new classes of devices, it is hard to get leverage simply
through the OEM model (in particular phones and tablets) due to the lack of brand appeal and fragmented

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nature of producers. By acquiring Nokia, Windows hoped to create its own products and compete directly
with Apple and Samsung. In other areas, Apple also possesses an advantage in distribution, by fronting its
own retail presences across the world. A good retail presence of Nokia and its customer service focus will
help Microsoft to compete against Apple.
VERTICAL INTEGRATION WILL IMPROVE PROFIT MARGINS

Microsofts stint in mobile phones has been mostly unsuccessful and with the newly acquired Nokias
32,000 staff, the company hopes be able to focus the resources on tablet and phone production. The
company thinks that the elimination of Nokias development and marketing costs would bump the
average profit per unit up from less than $10 to $40. It will also have complete control over the product,
allowing it to shape it as it wishes. By integrating a manufacturer into the fold, Windows will have a
similar offering to Apple in both hardware and software designed together. Nokia will assist tablet
manufacturing too. Nokias experience will not only come into play with the smartphones, but also
tablets. The Nokia Lumia 2520 is a tablet, and will help to compete over different price ranges compared
to the expensive Surface. There is also space to exploit phablets, a product somewhere between a phone
and a tablet. There is also an advantage for corporate owners, adopting BlackBerry style abilities to
administer a fleet of Windows Phones easily. Blackberrys current difficulties represent an opportunity for
Microsoft to exploit the market for corporate phones, a potentially lucrative business area. Vertically
integrating and providing complete solution with presence in the whole value chain will help Microsoft
reduce cost as well as capture the high segment which requires security as well as service and trust which
an android platform may not be able to deliver.
FUTURE MARKETING & BRANDING ISSUES

Now that Microsoft has acquired the mobile devices division of Nokia, along with a license to use the
NOKIA brand name for some feature phones for next ten years, there are huge speculations about the
future branding of these devices.
Although Microsoft is entitled to use the NOKIA brand name, it cannot do so for long because even now
NOKIA as a company and brand does exist (in the networking business) and thus Microsoft cannot risk
trading its mobile devices under NOKIA brand for much longer.
Secondly, Microsoft Mobile, a possible brand name for Microsofts line of mobile devices is not a wise
choice either. Reason being, Microsoft has always been synonymous to PCs and laptops and a mobile

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brand in its name may not be well received by the consumers. Thus, looking forward, Microsoft will have
to come up with a brand name for its new line of mobile devices which captures the essence of Microsoft
and windows platform as well as leverages the huge brand recall for NOKIA products. The main
contention that lies here is Consistency i.e. the new brand must also be consistent with Microsofts
organizational theme.
A common speculation that is on the rage in market is that Microsofts mobile phones would be badged as
Lumia, Surface or Xbox.
Apart from coming up with a strong and relevant brand name, other concern that lies ahead of Microsoft
is to use the blend of NOKIAs product along with Windows OS to compete with Googles android
platform, especially the Samsung-Android combo. Also the mobile devices product line can help
Microsoft push its Skype video chat and VoIP platform and maintain its supremacy despite a reasonable
threat from Google Hangout.
FUTURE TECHNOLOGY AND R&D ISSUES
Through NOKIAs acquisition, Microsoft suddenly got access to a huge pool of patent and a strong R&D
team in the mobile & smartphone technology. But the main point of concern here lies in the fact that will
Microsoft be able to leverage upon this vast knowledge and if so, how? The key points related to
technology and R&D are as follows:
1. Microsoft got around 8,500 design patents and rights to the Asha and Lumia brands, as well as a
10-year license to use the Nokia brand on feature phones. Nokia retained ownership of some of
the most valuable utility patents in the wireless industry. Microsoft didnt buy those patents, but it
licensed them for 10 years, giving Microsoft free arena that other rival phone makers would not
have.
2. Through this deal, Microsoft has gained a deeper store of research knowledge through Nokias
huge spent on R&D. All R&D Staff related to mobile products and smartphones is going to be
transferred to Microsoft. This will help Microsoft in leveraging the R&D for the manufacturing of
innovative products in mobile segment.
3. Microsoft has to compete with low cost manufactures (Chinese mobiles) but it can use Nokias
international manufacturing and distribution for its advantage in future.
4. Microsoft acquired the Morph Concept of Nokia which is a research and development for flexible
device bodies and nanotechnology. Nokias innovation can help Microsoft in making Windows
Phone OS more developed and innovative.

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LIST OF FIGURES

Expecte d EPS Impact by De al

0.04
FY-14

FY-15
-0.06

FY-16

-0.12

Fig 1: Expected impact on EPS after merger

Fig 2: Stock Price of Nokia after Deal Announcement

Fig 3: Stock Price of Microsoft after Deal Announcement

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Performance

Technology S-Curve

Desktop/
PC
Computin
Era of
Ferment

Mobile
Computing

Effort
Fig 4: Technology S-Curve

REFERENCES

1.
2.
3.
4.
5.
6.
7.
8.
9.

http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx
http://mashable.com/2013/09/03/microsoft-nokia-stock/
http://www.cbsnews.com/news/why-the-microsoft-nokia-merger-is-doomed/
https://www.microsoft.com/en-us/news/download/press/2013/strategicrationale.pdf
http://advantage.marketline.com/Product?pid=68875A1E-6946-4660-A49A-A0854BB82DCA
http://www.cnet.com/news/microsoft-closes-nokia-deal-pays-more-than-expected/
http://www.microsoft.com/en-us/news/press/2014/apr14/04-25nokiapr.aspx
http://www.bbc.com/news/business-27163667
http://www.forbes.com/sites/joanlappin/2014/04/24/final-details-before-microsoftnokia-closing/

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