In the modern world of business, strategic partners happen to be one of the major channels to success. Notably, many corporations are looking for strategic partners to either acquire or get acquired by them simply because of the synergy that comes with the merger and acquisition. In the world of technology, mergers and acquisitions are a common thing, especially for the newly establishing technology firms which get acquired by the legends in the industry. However, it is not common to hear of one tech giant acquiring another well-established firm. This was the case when Microsoft decided to take over Nokia Devices and Services Company. In light of this merger, this paper seeks to shed more light into the order of events as well as the environmental factors that surrounded the merger between Microsoft and Nokia. Considering the talk of the town and the recent hullabaloo in the markets on the appropriateness of the Microsoft-Nokia merger, this paper seeks to provide details that will enable the reader to understand the financial specifics of the deal and how it impacted on the two companies both separately and in the strategic partnership.
Microsoft and Nokia announced the deal for the merger in September of 2013. The deal was announced by the CEO of Microsoft Steve Ballmer through an email to the employees indicating that Microsoft was engaging in a deal to acquire the Finnish company for a price of $7.2 billion (Ando & Rigby, 2013). Simultaneously, the CEO of Nokia made the announcement to the employees and shareholders of his company indicating that the deal would be a win-win situation for all stakeholders involved, and these included the shareholders and the customers of the two firms. Notably, both companies had high hopes for the deal indicating that the two firms highly valued the synergistic relations that the merger was set to bring on board. Considering the recent developments in the books of the accounts of the merged enterprise, it is becoming a little difficult to determine whether the strategic partnership was as strategic as it sounded when the CEOs of the two companies announced the deal.
Secondly, it is important to looks at the circumstances leading to the merger as this helps the reader in identifying what kind of a merger this was and the way it influenced the two companies. The merger came at a time when the tablets market was considerably expanding. Microsoft was focused on venturing into the market and gaining a strategic partner came as one of the most appropriate steps that Microsoft could take in developing its business to the market (Microsoft News Center, 2013). Notably, Microsoft had established its business in the production of software, operating systems when at the same time Android, and iOS were quickly rising and taking control of much of the software and operating systems space that the company previously occupied. Notably, the higher returns and the increased competition for the company from Alphabet Inc. and Apple Inc. left Microsoft desiring a share of the mobile devices software market. Since Microsoft already had the operating system dubbed Windows Phone, getting the hardware for this system was the only headache and this lead to the consideration of Nokia as a strategic partner. On the other hand, there was Nokia with globally competitive hardware considering that the business was already well established in the mobile devices market. However, the recent years had been tough for the company considering that the company had not been able to find strategic partners to enable it to compete in the tablets market simply because it lacked an appropriate operating system to run on its devices. Consequently, looking for a strategic partner for this company was the only solution to ensure that it succeeded in the tablets market. This is how Nokia settled for Microsoft as a strategic partner. Looking into the two companies above, the merger ought to be considered as a mixed conglomerate merger considering the fact that the two companies were in different product lines but due to the need for market and product extension, they considered the strategic partnership. In other words, both Nokia and Microsoft considered the merger since it would help both companies to extend their products into the market for tablets and smartphones. Nokia would probably increase the sales of its hardware and Microsoft extend the sales of the software and in the end, everybody would come out as a winner (Pai, 2015). Concerning market extension, there were areas such as EMEA countries where Nokia had established as a household brand in mobile phones while in other areas Microsoft had established itself as trustworthy operating systems and other software producer and linking the two ensured that both companies accessed markets that they would have never extended into. It is on these two bases that the conclusion was reached on the mixed conglomerate merger.
The second major issue with the Microsoft-Nokia merger is the issue of competition. The technology industry is a highly competitive industry where a simple mistake such as a merger gone wrong may mean the death of a company including other irreparable mistakes. Notably, this comes as a result of the fact that technology is quickly changing and the faster a company adapts to the changes the better for the company. Taking the discussion into perspectives, Microsoft and Nokia considered the merger as the avenue to venturing into the smartphones and tablets market (Singh, 2014). This adaptation came in a little too late for the company considering the fact that when they entered the industry in 2013 through the Lumia series. Google, now known as Alphabet Inc., had already established its roots in the market through strategic partnerships with companies such as Samsung, Tecno, Huawei and HTC among others with these companies having the rights to provide phones operating the Android systems. Besides, Apple Inc. was already controlling the market in the US with iOS and OSX working on the iPhone, iPad, and the Mac computers. This meant that the market was already too narrow for the Windows operating smartphones, and the competition was already too high. This type of competition is referred to as the monopolistic type of competition where there are many buyers and many sellers and winning against this competition does not only require knowledge of one's competitive advantage but also knowing what the market requires. Evidently, it becomes increasingly harder for organizations compete against Android hence introducing the Microsoft phones and tablets including the Lumia series became difficult for the merged companies.
Only about two years after the merger, Microsoft reported an impairment loss of about $7 billion at the beginning of the year 2016 (Yahoo! Finance, 2016). The impairment loss was purely associated with the goodwill recorded in the acquisition of Nokia. Notably, the announcement of the impairment almost equaled the amount that Microsoft paid for the merger painting a grim picture of the possibility that Microsoft overvalued the acquisition hence overpaying for the same. The rationale for this argument is that after only two years of the merger, Microsoft cannot confidently report increased value of its assets. Among other factors, the company has not recorded any considerable growth its business. The smartphones and tablets operating on the windows phone platform still attract a lower market from the industry and in both 2013 and 2014, Microsoft was forced to improve some problems associated with its Windows operating systems. The objective was to improve the user experience and in the process ensure that it attracts more customers for the company. On the part of Nokia, the merger may be considered as one that enabled it to extend the product lines but considering the lower sales; it appears that the competition has been raining hard on the company hence the consideration of other strategic positioning moves for the company.
The creation of synergistic strategic partnerships is always the dream of every merger or acquisition and the same applies to the case of Microsoft and Nokia. The merger has been widely researched and in one of the studies, the synergy created by the merger was considered to be up to 13% of the average market capitalization of Nokia (NASDAQ.com, 2016). This is to say that for both companies, Nokia and Microsoft, the merger was considered to produce additional value and it is for this reason that both companies recorded an increase in the value of the goodwill recorded upon the signing of the deal.
The second major advantage coming with the deal was the issue of increased accruing tax benefits. The transaction, in this case, was cash for shares transaction. This transaction involved the purchase of the entire Nokia phones business in exchange for $7.2 billion in cash. The deal resulted in tax saving for the companies considering the fact that the purchase of capital from another company does not attract the corporate taxes (NASDAQ.com, 2016). Notably, the tax savings, therefore, became a major factor in the success of the deal.
The third consideration in the deals was the implication of the deal on the performance of the shares of the two companies. The announcement of the deal by Microsoft resulted in the shares of the company sliding 6% as the shareholders of the company protested the company’s move to invest in the poorly performing company. On the other hand, the shares of the Nokia Company shot up recorded positive reception of the news by the market. At the time of the announcement, the shares of Microsoft closed at $31.15 from a previous day’s high of $34.75 (NASDAQ.com, 2016).
Performance of Microsoft (Source NASDAQ.com)
On the other hand, the shares of Nokia moved up from $3.9 to $6.14 following the announcement of the deal in 2013 (NASDAQ.com, 2016). However, the over the following year the shares of both companies indicated an upward trend with Nokia reaching its highest price in 5 years of $8.64. This indicated positive sentiments and hopes that the deal would result in positive returns for the company. On the other hand, the price of Microsoft shares continued rising throughout 2014 but in 2015 the company started reporting negative news about the acquisition and volatility in the share price increased. Nonetheless, the markets perception of the deal appeared positive as indicated by the bullish trend on the shares of the two companies as well as the improving price-to-equity ratios of the companies, which on average made the two shares much cheaper than they were before the deal.
Nokia’s Share Price performance (Source NASDAQ.com)
The last major implication of the deal was the implication of the restructuring on the management of the company. At the inception of the transaction, the CEO of Nokia was drawn to manage the phone production business. However, the deal resulted in calls for the management of Microsoft to step down with the CEO being blamed for investing in a business that the investors did not consider viable. In 2016 just before the CEO leaves the company, Microsoft reported impairment losses of up to $7 billion about the investment indicating the starting of new wrangles in the management of the company (Yahoo! Finance, 2016). The management problems in Microsoft help in indicating that while the expectations were high in the sky for a good deal between the two companies, the merger did not result in the expected synergy value.
In conclusion, this paper discussed the merger between Nokia and Microsoft. The type of this merger was the mixed conglomerate merger considering that the two companies joined to have market and product extension. It was cash for stock deal and resulted in more than 13% in value of synergy and commendable rise in the market capitalization of the two companies. However, the competition in the sector was tough and as a result, the tablets and the Windows phones produced after the merger did not result in the value previously anticipated by the companies.
References
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Microsoft News Center. (2013). Microsoft to acquire Nokia’s devices & services business, license Nokia’s patents and mapping services | News Center. News.microsoft.com. Retrieved 22 May 2016, from https://news.microsoft.com/2013/09/03/microsoft-to-acquire-nokias-devices-services-business-license-nokias-patents-and-mapping-services/#sm.001ret2ur1428eu1qxr2irj4s5xe1
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Singh, N. P. (2014). Microsoft Acquired Nokia in Unipolar Operating System Market. Independent Journal of Management & Production, 5(3), 598-622.
Worstall, T. (2013). The Real Reason Microsoft Bought Nokia. Transaction Costs. Forbes.com. Retrieved 22 May 2016, from http://www.forbes.com/sites/timworstall/2013/09/08/the-real-reason-microsoft-bought-nokia-transaction-costs/#584889d87d85
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