Microsoft set to buy Nokia for €5.4 billion

This is big. Microsoft is set to buy Nokia’s devices and services division for €5.4-billion (US$7.1-billion).

The move, confirmed by both parties, will see the companies cement the close ties they’ve had ever since ex-Microsoft executive Stephen Elop took over as CEO of the embattled Finnish phone maker.

Certainly, the move looks like it will facilitate Elop’s return to the Redmond-based giant as Executive Vice President of Devices & Services, fueling speculation that he could be the man to take over from Steve Ballmer, who will retire in 2014.

“Building on our successful partnership, we can now bring 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,” said Elop. “With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.”

Following the transaction, Nokia plans to focus on its three established businesses: NSN, its network infrastructure and services arm; HERE, its mapping and location services division; and Advanced Technologies, its development and licensing business.

“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 Risto Siilasmaa, Chairman of the Nokia Board of Directors and, following today’s announcement, also Nokia interim CEO.

Its mapping business HERE will certainly benefit from the sale: as part of the transaction, Nokia will grant Microsoft a 10 year non-exclusive license to its patents as of the time of the closing, and Microsoft will grant Nokia reciprocal rights related to HERE services. In addition, Nokia will grant Microsoft an option to extend this mutual patent agreement to perpetuity.

When it comes to the actual mobile devices meanwhile, Microsoft has agreed to a 10 year license arrangement with Nokia to use the Nokia brand on current mobile phones products. Nokia will continue to own and maintain the Nokia brand. Under the terms of the transaction, Microsoft has agreed to a 10 year license arrangement with Nokia to use the Nokia brand on current and subsequently developed products based on the Series 30 and Series 40 operating systems.

“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.”

“We are excited and honored to be bringing Nokia’s incredible people, technologies and assets into our Microsoft family. Given our long partnership with Nokia and the many key Nokia leaders that are joining Microsoft, we anticipate a smooth transition and great execution,” Ballmer said. “With ongoing share growth and the synergies across marketing, branding and advertising, we expect this acquisition to be accretive to our adjusted earnings per share starting in FY15, and we see significant long-term revenue and profit opportunities for our shareholders.”

Once the transaction has closed, Nokia will be restricted from licensing the Nokia brand for use in connection with mobile device sales for 30 months and from using the Nokia brand on Nokia’s own mobile devices until the end of 2015.

The sale is expected to fully go through by the end of the first quarter of 2014. It signals the first clear piece of action we’ve seen in Microsoft’s bid to reinvent itself as a devices and services company. Given that Ballmer announced its restructuring a few weeks ago, it’s pretty obvious that this deal has been in the works for a while now.

One thing that will be interesting to gauge is the reaction of other manufacturers Microsoft licenses its software to, especially given that Nokia is apparently set to build its own 10-inch tablet.