When Stephen Elop was poached from Microsoft to head-up Nokia in autumn 2010, the tin-foil hat-wearing conspiracy theorists warned that Elop was little more than a Trojan horse.
He would subvert the company from the inside, they said, and hand it over on a (cheap) plate to Microsoft before either ascending triumphantly to the throne at the software giant, or retiring early to count his freshly minted fortune.
So when ailing Nokia announced the sale of its handset division to Microsoft for a total of €5.4bn at the beginning of September – with Elop shifting to Microsoft to become executive vice president of Devices and Services at the newly re-organised software giant – the tin-foil hatters no doubt frothed with vindication.
While there’s absolutely no evidence of a conspiracy of any kind, the end-result would appear to be the same: Elop has even been installed as the bookies’ favourite to succeed Steve Ballmer when he retires as Microsoft CEO within the year, and trails only Sir Alex Ferguson in Computing’s own prestigious and scientifically accurate online poll on who should succeed Ballmer at Microsoft.
But is it a good deal for both Microsoft and Nokia, and what will it mean for Microsoft, and the development of smartphones and mobile devices more broadly?
Give and take
Microsoft will pay Nokia a total of €3.79bn for Nokia’s Devices and Services unit – basically, the Nokia handset business – and another €1.65bn for a non-exclusive, 10-year licence to the company’s patents with options to extend, if necessary.
On top of that, Microsoft has generously agreed to provide €1.5bn in long-term financing to Nokia in the form of convertible bonds “at attractive terms”, according to credit ratings agency Moody’s, which isn’t conditional on the transaction going through.
And the whole deal is subject to a chunky $750m termination fee payable by Microsoft to Nokia should it get blown out of the water at the regulatory clearance stage.
Curiously, the announcement came just weeks after the Wall Street Journal had reported that talks between the two companies over an acquisition had floundered “over price and worries about Nokia’s slumping market position, among other issues”. According to the WSJ’s sources, the talks weren’t likely to be revived.
The price represents a massive crash from the €150bn figure that Nokia had been valued at just six years ago. However, it was possibly not so bad for a unit of the company that posted a €1.1bn operating loss on net sales of €15.7bn in 2012 – down by a jaw-dropping 34.5 per cent from the €23.9bn in revenues it achieved just a year earlier.
That, incidentally, is the financial performance achieved by the man installed as favourite to succeed Ballmer at Microsoft.
Moreover, the €5.44bn transaction price more or less matches Nokia’s current outstanding indebtedness – give or take a billion – which has loomed so large over the company that until the deal was announced Nokia had become the most “shorted” stock in Europe.
In the first quarter of 2014 alone, it needs to repay or refinance €1.75bn (nearly 40 per cent of its total indebtedness), as well as finding €600m to repay a bank term loan relating to its purchase of the other half of Nokia Siemens Networks from Siemens (NSN).
Professional investors, who are generally more right than wrong, had expected Nokia to be successively hammered with high charges and punitive margins as each batch of bonds came up for renegotiation, driving the nails deep into the company’s coffin.
Happily, though, those hedge funds and other assorted “vulture capitalists” were thoroughly rinsed when Nokia’s stock bounced on news of the deal, collectively losing as much as €500m.
Furthermore, as a result of the deal, “rump Nokia” will enjoy healthy operating profit margins based on the NSN telecoms equipment unit – fully acquired by Nokia for €1.7bn it didn’t have in early August – which reported 2012 revenues of €13.4bn.