Negotiation

2013
MICROSOFT – NOKIA

Trần Xuân Linh
FPT University
11/18/2013

MICROSOFT – NOKIA

Contents
SUMMARY ............................................................................................ 2
Introduction ............................................................................................ 2
Microsoft .............................................................................................. 2
Nokia.................................................................................................... 2
The story between Microsoft – Nokia .................................................. 3
TERMS OF THE AGREEMENT .............................................................. 3
Nokia hesitates in closing the deal with Microsoft .................................. 5
COMMENT ............................................................................................ 6
THE PROS AND CONS ...................................................................... 7
CONCLUSION .......................................................................................... 8
Reference ................................................................................................ 8

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SUMMARY
Microsoft is under enormous pressure to reinvent itself for a world where mobile devices are the animating force in technology, rather than personal computers.
The company’s $7.2 billion deal for Nokia’s phone units is an attempt to catapult the company up the ranks in the smartphone market, which has been dominated by more established players, like Apple and Google.
Microsoft has agreed a deal to buy Nokia's mobile phone business for 5.4bn euros
($7.2bn; £4.6bn).
Nokia will also license its patents and mapping services to Microsoft. Nokia shares jumped
35% on the news, whereas Microsoft's fell more than 5%.The purchase is set to be completed in early 2014, when about 32,000 Nokia employees will transfer to Microsoft. Nokia has fallen behind rivals Samsung and Apple, while critics say Microsoft has been slow into the mobile market. Following the case of Microsoft – Nokia, this report will present the deal of two corporations and pointing out reasons that make Nokia hesitate in closing the deal with Microsoft.

Introduction
Microsoft
Microsoft Corporation is an American multinational software corporation headquartered in Redmond, Washington that develops, manufactures, licenses, and supports a wide range of products and services related to computing. The company was founded by Bill Gates and Paul
Allen on April 4, 1975. Microsoft is the world's largest software maker measured by revenues. It is also one of the world's most valuable companies.
On August 20, 2013, Microsoft announced that its CEO, Steve Ballmer, will retire from the company after a successor is chosen.

Nokia
Nokia Corporation is a Finnish communications and information technology multinational corporation that is headquartered in Espoo, Finland. Its Nokia Solutions and Networks company provides telecommunications network equipment and services, while Internet services, including applications, games, music, media and messaging, and free-of-charge digital map information and navigation services, are delivered through its wholly owned subsidiary Navteq.
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On 2 September 2013, Microsoft announced its intent to purchase Nokia's mobile phone business unit as part of an overall deal totaling €5.44 billion (US$7.17 billion). Stephen Elop,
Nokia's former CEO, and several other executives will join Microsoft as part of the deal.

The story between Microsoft – Nokia
Microsoft Corporation and Nokia Corporation today announced that the Boards of Directors for both companies have decided to enter into a transaction whereby Microsoft will purchase substantially all of Nokia’s Devices & Services business, license Nokia’s patents, and license and use Nokia’s mapping services.
Under the terms of the agreement, Microsoft will pay EUR 3.79 billion to purchase substantially all of Nokia’s Devices & Services business, and EUR 1.65 billion to license
Nokia’s patents, for a total transaction price of EUR 5.44 billion in cash. Microsoft will draw upon its overseas cash resources to fund the transaction. The transaction is expected to close in the first quarter of 2014, subject to approval by Nokia’s shareholders, regulatory approvals and other closing conditions.
Building on the partnership with Nokia announced in February 2011 and the increasing success of Nokia’s Lumia smartphones, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing. For Nokia, this transaction is expected to be significantly accretive to earnings, strengthen its financial position, and provide a solid basis for future investment in its continuing businesses. “It’s a bold step into the future – a win-win for employees, shareholders and consumers of both companies. 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,” said Steve Ballmer, Microsoft chief executive officer. “In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”

TERMS OF THE AGREEMENT
Under the terms of the agreement, Microsoft will acquire substantially all of Nokia’s Devices and Services business, including the Mobile Phones and Smart Devices business units as well as an industry-leading design team, operations including all Nokia Devices & Services-related production facilities, Devices & Services-related sales and marketing activities, and related support functions. At closing, approximately 32,000 people are expected to transfer to Microsoft, including 4,700 people in Finland and 18,300 employees directly involved in manufacturing, assembly and packaging of products worldwide. The operations that are planned to be transferred to Microsoft generated an estimated EUR 14.9 billion, or almost 50 percent of Nokia’s net sales for the full year 2012.
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Microsoft is acquiring Nokia’s Smart Devices business unit, including the Lumia brand and products. Lumia handsets have won numerous awards and have grown in sales in each of the last three quarters, with sales reaching 7.4 million units in the second quarter of 2013.
As part of the transaction, Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm, as well as other licensing agreements.
Microsoft is also acquiring Nokia’s Mobile Phones business unit, which serves hundreds of millions of customers worldwide, and had sales of 53.7 million units in the second quarter of
2013. Microsoft will acquire the Asha brand and will license the Nokia brand for use with current Nokia mobile phone products. Nokia will continue to own and manage the Nokia brand.
This element provides Microsoft with the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia’s mobile phones to serve as an on-ramp to
Windows Phone.
Nokia will retain its patent portfolio and will grant Microsoft a 10-year license to its patents at the time of the closing. Microsoft will grant Nokia reciprocal rights to use Microsoft patents in its HERE services. In addition, Nokia will grant Microsoft an option to extend this mutual patent agreement in perpetuity.
In addition, Microsoft will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four-year license.
Microsoft will also immediately make available to Nokia EUR 1.5 billion of financing in the form of three EUR 500 million tranches of convertible notes that Microsoft would fund from overseas resources. If Nokia decides to draw down on this financing option, Nokia would pay back these notes to Microsoft from the proceeds of the deal upon closing. The financing is not conditional on the transaction closing.
Microsoft also announced that it has selected Finland as the home for a new data center that will serve Microsoft consumers in Europe. The company said it would invest more than a quarter-billion dollars in capital and operation of the new data center over the next few years, with the potential for further expansion over time.

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Nokia hesitates in closing the deal with Microsoft

According to sales report , Nokia, the struggling Finnish telecommunications company, said it sold 8.8 million of its high-end Lumia smartphones in the third quarter of the year, a 19 percent increase from the previous quarter. Nokia also sold 55.8 million low-cost phones over the same period, a small quarterly rise.
The announcement will be music to the ears of Microsoft, whose proposed $7.2 billion takeover of Nokia’s handset unit is expected to close early next year and is aimed at expanding
Microsoft’s hardware offerings into direct control over manufacturing cellphones.
After agreeing to buy Nokia’s handset business in September, Microsoft is looking to ride a wave of new smartphones and tablets that the European firm has announced in recent weeks.

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Those include the Lumia 1520, a Windows Phone that will come with a 6-inch display, and the Lumia 2520, Nokia’s first-ever tablet that has similar characteristics to Microsoft’s own tablet, the Surface 2.
Despite rising smartphone sales, Nokia still reported an overall operating loss from the handset business, which continues to struggle from low-cost competition from manufacturers using Google’s Android operating system.
The company said that the division’s operating loss stood at 86 million euros ($118 million) in the third quarter of the year, a significant improvement on the 672 million euro loss in the same period last year.
The improvement was because of the growing traction of Nokia’s smartphones in Western markets, particularly in the United States, where sales jumped six fold, to €214 million.
Increased revenue in costly smartphones, however, was offset by falling sales of Nokia’s low-cost handsets. In China, for example, third-quarter revenue fell 23 percent, to €215 million, while sales in the wider Asian-Pacific region tumbled 21 percent, to €769 million, over the same period. “Net sales decreased in all regions, except for North America,” Nokia said in a statement on
Tuesday. The company’s share price rose 5.8 percent in afternoon trading in Helsinki on
Tuesday.

COMMENT
Is Microsoft buying Nokia entirely?
Nope. The software company would be purchasing only the business venture in which they are largely involved, the Mobile Devices and Services Section. We all know what under Stephen
Elop, Nokia decided to make the jump and partner with Microsoft to release their brand of smartphones. According to the press release.
What will happen to Nokia Corporation?
Nokia Corporation will still exist, focusing on its other business ventures:
1.
2.

NSN, a leader in network infrastructure and services;
HERE, a leader in mapping and location services; and
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3.
Advanced Technologies, a leader in technology development and licensing.
What will happen to the Nokia branding in mobile phones?
Nokia will continue to own and maintain the Nokia brand. According to the latest press release, The transaction is expected to close on the first quarter of 2014. From the context of the statement, all current phones (including the Lumia and Asha series) will still use the Nokia brand.
The next time we can talk about Nokia devices after the transaction is done will be on 2016.

THE PROS AND CONS
 Nokia has to cover up all the financial losses for the past years. Even with the current upward trend of the Lumia brand, the attained profit is not enough. The total purchase price of
EUR 5.44 billion will be a big help for the recovery of the company and to start anew.
 Nokia will be relieved of the expectations for the company to compete in the smartphone race. It will be purely platform wars – Apple vs Google vs Microsoft. Nokia can now focused on its other business ventures that has a higher possibility of success due to the lesser number of competitors.  Nokia still has a chance to create a mobile device division and release their own mobile phones after the restriction for Nokia licensing brands which will be until December 31, 2015.
Although the agreement states that the Nokia branding will be for S30 and S40 devices, I hope the company will have new surprises to offer by that time.
 Microsoft is a stable software company that expands its business to different fields. With the acquisition of the Nokia Mobile Devices and Services, they had completely ventured to mobile phone business. As such, the company will give adequate funding and focus for further development of the devices. Therefore, what Nokia had started won’t go to waste. Furthermore, the Lumia becomes the “official Windows Phone”, so other minor WP users may end up backing out from the platform
As much as there are benefits, I have seen some drawbacks to the deal established between
Microsoft and Nokia.


We have before heard of the complaints of top executives of Nokia and EE about the slow development of the Windows Phone, which is entirely Microsoft’s responsibility. We hope there are improvements in terms of WP, specifically app releases. We just have to wait and see what Stephen Elop has in store for Lumia.
 With the restriction of the Nokia branding and licensing, the Finnish company had reached the endpoint as a mobile phone company. That is one sad truth we have to admit – even the 10 year agreement on continuation of Nokia branding is time-bound.
 Microsoft has purchased the license to use the Nokia brand on mobile phones for ten years. It’s also bought the ‘Lumia’ and ‘Asha’ brands.

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CONCLUSION
Microsoft’s predicament is a flashback to the situation Apple found itself in during the early
1990s. At that time, Apple arguably had a superior computer product, the Macintosh, but it languished as PCs running Microsoft’s Windows operating system engulfed most of the market.
One of the biggest problems for Apple then was that Microsoft had succeeded in gaining the allegiance of software developers, who produced a bounty of applications. They’re stuck in the same vicious cycle that Apple was in 20 years ago.

Reference http://www.bbc.co.uk/news/business-23940171 [Access 18 October 2013] http://news.cnet.com/8301-10805_3-57601766-75/for-microsoft-and-nokia-fewer-secrets/ [Access 18 October 2013] http://news.cnet.com/8301-1035_3-57601037-94/nokia-selling-phone-business-to-microsoftpainful-but-necessary/ [Access 18 October 2013] http://www.marketwatch.com/story/nokia-to-sell-devices-services-business-to-microsoft-in-eur544-billion-all-cash-transaction-2013-09-02 [Access 18 October 2013] http://www.marketwatch.com/story/microsoft-nokia-deal-is-ballmers-last-stand-2013-09-03 [Access 18 October 2013] http://seekingalpha.com/article/1694342-microsofts-purchase-of-nokia-and-go-it-alone-strategymake-it-a-sell [Access 18 October 2013] http://www.sepharimgroup.com/2013/09/05/microsoft-buys-nokia-happens-nextmatters/#sthash.TiiE2Tbv.dpbs [Access 18 October 2013] http://www.nokiarevolution.com/pros-cons-nokias-biggest-deal-microsoft-nokia-enthusiast-feel/ [Access 18 October 2013] http://www.theverge.com/2013/9/2/4688530/microsoft-buys-nokias-devices-and-services-unitunites-windows-phone [Access 18 October 2013] http://www.microsoft.com/en-us/news/press/2013/sep13/09-02announcementpr.aspx [Access 18
October 2013]

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