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Microsoft buys Nokia phones: smart move or desperate gamble?

Microsoft buys Nokia phones: smart move or desperate gamble?
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Struggling Nokia has agreed to sell its handset business to deep-pocketed Microsoft for 5.44 billion euros – described by one analyst as “peanuts”.

Apparently it was a reluctant sale with Nokia’s board meeting over 50 times before agreeing to Microsoft’s offer, but now they’re talking up the deal.

Interim CEO and chairman Risto Siilasmaa told a news conference: “The Nokia Board of Directors believes that this transaction creates significant economic value to our share holders. We expect it will be significantly accretive to earnings, it will clearly strengthen our financial position and it will provide a solid basis for future investment in Nokia’s continuing businesses.

The mighty fallen

The Finnish firm was once the world’s dominant handset maker but has long since been overtaken by Apple and Samsung in the extremely competitive market for more powerful and profitable smartphones.

Nokia, which had a 40 percent share of the handset market in 2007, now has a mere 15 percent share, with an even smaller 3.3 percent in smartphones, contrasting with Apple’s 14.2 percent and Samsung’s 31.7 percent.

Too late or no choice

Analysts had mixed feelings about this tie-up. Brenda Kelly with the IG Group said this may have come too late to save the handset maker: “I think this is a pretty decent step for Nokia. In terms of their share price we’ve seen a huge decline there and it gives them a little bit more bolstering in the hardware market, particularly with Microsoft in partnership. So I think in that respect it does give a little bit more upside for their share price, but I do feel that in the grand scheme of things it might be a little bit too late for that company.”

“Microsoft cannot walk away from smartphones, and the hope that other vendors will support Windows Phone is fading fast. So buying Nokia comes at the right time,” said Carolina Milanesi, an analyst at Gartner.

“In today’s market it is clear that a vertical integration is the way forward for a company to succeed. How else could Microsoft achieve this?”

‘Bold step’

Microsoft chief executive Steve Ballmer called it a “bold step into the future” in his company’s transformation process as it tried to catch up in the booming market for mobile devices.

The Nokia deal thrusts Microsoft deeper into the hotly contested mobile phone market, despite some investors urging it to stick to its core strengths of business software and services.

Nokia’s boss Stephen Elop goes back to Microsoft, where he used to work running the business software division before jumping to Nokia in 2010.

He will be the head of Microsoft’s mobile devices business, but is also being discussed as a possible replacement for retiring CEO Steve Ballmer.

Fire sale?

Analyst Tero Kuittinen at consultancy Alekstra said the sale price of Nokia’s phone business, about a quarter of its sales last year, represented a “fire sale level”, though others were less clear about what a shrunken Nokia was worth.

“What should be paid for a declining business, where market share has been constantly lost and profitability has been poor?” said Hannu Rauhala, analyst at Pohjola Bank. “It is difficult to say if it’s cheap or expensive.”