Microsoft To Buy Nokia Mobile Business In $7.1 Billion Blockbuster Deal

Microsoft late Monday struck a deal aimed at reshaping the battle lines in the smartphone era by moving to buy Finnish smartphone giant Nokia's devices and services business in a $7.1 billion deal.

The deal would provide Microsoft with a smartphone business that has struggled to compete against rivals Samsung and Apple.

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Nokia CEO Stephen Elop, a former Microsoft executive who has been touted as one of the leading candidates to replace Microsoft CEO Steve Ballmer, will rejoin Microsoft upon completion of the deal.

The Nokia deal comes only six days after Ballmer announced that he plans to step down as CEO sometime over the next year.

The deal would add about another $20 billion in sales to Microsoft's top line ($14.9 billion euros) from Nokia's phone business and approximately 32,000 employees to the Microsoft payroll. That would make Microsoft a $100 billion behemoth with a significant phone business and 131,139 employees.

Approximatley 18,300 Nokia employees involved in manufacturing and assembly of Nokia products and 4,700 people in Finland are expected to be transferred to Microsoft if the deal is completed.

"It's a bold step into the future -- a win-win for employees, shareholders and consumers of both companies," said Ballmer in a prepared statement. "Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services."

Ballmer said Nokia will bring Microsoft "innovation and strength in phones at all prices points" along with "proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management and hardware sales, marketing and distribution."

For solution providers, the deal raises the ante yet again as to what role they will play as Microsoft recasts itself to compete in a services and devices era. They say Microsoft has struggled to provide a clear channel strategy in this new era, refusing to allow the vast majority of solution providers to sell the Microsoft Surface tablet.

Partners say it is critical that a new Microsoft CEO bring a more partner-centric model to the company's devices and services makeover.

Under the terms of the deal, Microsoft will pay $5 billion to purchase nearly all of Nokia's mobile devices and services business and another $2.18 billion to license Nokia's patent portfolio.

The two companies said they expect the deal, which must still be approved by Nokia's shareholders and regulatory agencies, to close in the first quarter of 2014.

NEXT: The Financial Impact Of The Deal On Microsoft, Nokia

Citing "ongoing share growth and the synergies across marketing, branding and advertising," Ballmer said Microsoft expects the deal to be accretive to "adjusted earnings per share" starting in fiscal year 2015. He said the deal provides "significant long-term revenue and profit opportunities" for Microsoft shareholders.

Nokia said the transaction is expected to be "significantly accretive to earnings," providing what it called a "solid basis for future investment" in its continuing businesses.

The deal, however, is sure to face intense scrutiny by Nokia and Microsoft shareholders, who have expressed frustration at the ability of both companies to compete with Apple and Samsung.

Elop, who left Microsoft in September 2010 to take the top Nokia job, made a big bet in February 2011 to produce Nokia phones based on Microsoft's Windows 8 operating system. But it has failed to pay off, with Windows phones accounting for only 3.7 percent of smartphone shipments in the second quarter, according to research firm IDC.

Ballmer, meanwhile, has been taken to task by investors for not making bigger gains in the consumer-driven IT era dominated by smartphones and tablets.

In the wake of the news that Ballmer was retiring, Microsoft shares surged 7 percent and the company's market value soared a whopping $18 billion from $269.81 billion to $288.05 billion.

On Friday, Microsoft said it had inked a "cooperation agreement" with ValueAct Capital, a San Francisco-based investment firm that owns about 0.8 percent of Microsoft's outstanding shares.

Under terms of the agreement, Microsoft will give ValueAct Capital President Mason Morfit the option of joining its board of directors at the first quarterly board meeting after its annual shareholders meeting, which takes place Nov. 19.

Nokia Chairman of the Board of Directors Risto Siilasmaa, who is becoming Nokia's interim CEO, called the deal "an important moment of reinvention" for Nokia from what he called a "position of financial strength.

"After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders," said Siilasmaa. "Additionally, the deal offers future opportunities for many Nokia employees as part of a company with the strategy, financial resources and determination to succeed in the mobile space."

Elop, the former head of Microsoft's successful Office division who faces the difficult task of integrating Nokia into the Microsoft fold, said the deal will build on the Nokia-Microsoft partnership, bringing together "the best of Microsoft's software engineering with the best of Nokia's product engineering, award-winning design, and global sales, marketing and manufacturing."

In an open letter to consumers, Elop and Ballmer said the two companies 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. Nokia and Microsoft are committed to the next chapter. Together we will redefine the boundaries of mobility."

PUBLISHED SEPT. 3, 2013