Microsoft - Nokia Acquisition

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Quick overview of the Microsoft’s acquisition of Nokia

The mobile phones market is quite new but is growing and evolving very quickly. First device were introduced in 1979 and are now considered as antiquities. Nowadays, third and fourth generation networks, as well as very fast processors, entailed the creation of a world linked with mobile phone devices.

The complexity of the market and the technics has increased dramatically, creating huge barriers to overcome for new entrants. Moreover, global companies, like Apple, Samsung or BlackBerry, have already built a large customer base, loyal to these brands’ products and systems. The best opportunities for the smartphone industry are expected to develop mainly in emerging markets, where smartphones will quickly replace PCs.

One of our protagonists, Microsoft, obviously needs to quickly penetrate those markets in order to become a serious competitor. Microsoft does have a strong competitive advantage, which is the brand name in PCs. The company can also develop a singular and personalised link with their customers by assisting them during the shift of technology. To do so, Microsoft decided to develop a partnership with an established mobile phone company: Nokia. Indeed, according to the International Data Corporation (IDC), in September of 2010, Nokia (Symbian OS) had 40.1% share of the worldwide smartphone market, followed by BlackBerry (17.9%), Android (16.3%), and Windows Phone (6.8%).

On February 11th, 2011, Microsoft initiates acquisition talks with Nokia. It is interesting to note that the acquisition talks began only 5 months after Nokia hired Stephen Elop as CEO, a former Microsoft employee at the Head of the huge ‘Business Division’ at Microsoft. However, talks rapidly stalled and reached an impasse on pricing of Nokia’s handset business. The relationship between both companies was then limited to a strategic partnership. The strategy was to create value for consumers by leveraging both companies’ assets and core competencies. At an operational level, Nokia accepted to adopt Microsoft’s Windows Phone as their operating system, Bing as their search engine and adCenter for their advertising campaigns. Nokia also agreed to bring its expertise in hardware design, language support and logistic with their distribution channels.

Thanks to this partnership, Nokia hoped to drastically reduce its R&D costs and to access key Microsoft’s assets (search, global advertisement, productivity, development, cloud computing and marketplace). In return, Microsoft expected to gain access to Nokia’s global presence, to benefit from Nokia’s hardware expertise for future versions of the OS, and to receive revenue from WP7 royalties. Strategically, this partnership was meant to allow Microsoft to regain a vital global market share, in order to reduce the pace of the Google platform expansion but also to access additional areas, where Nokia has local capabilities and partners. Unfortunately, after 2 years, the partnership appeared to be not as successful as expected and the situation was actually quite embarrassing. Indeed, Nokia’s market share decreased sharply, from 40% to 15%. The results of the partnership were not satisfying and Microsoft even faced a ‘do or die’ situation to infiltrate the smartphone industry.

        As a result, in January 2013, Microsoft has re-initiated talks, aiming at fully acquiring Nokia. However, there were some tough issues during the negotiations. The paper will focus on these problems faced during the acquisition negotiation. Nonetheless, the bargaining was successful and on September 3, 2013, Microsoft finally announced a deal to acquire Nokia’s handset and services business for $7.2 billion. This agreement marks a strong move by Microsoft to upgrade its presence in handheld devices. It also ends Nokia’s long struggle to enter the hyper-competitive (and extremely lucrative) smartphone market.

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From left to right: Stephen Elop, CEO of Nokia & Steve Ballmer, CEO of Microsoft.

Analysis of the negotiation through the 10 elements of negotiation

1. People – Who?

Interpersonal relationship

Steve Ballmer, Microsoft’s CEO, contacted first Stephen Elop, Nokia’s CEO in February 2011 but they reached an impasse on the pricing of handset business. The talks were re-initiated by Microsoft in January 2013.

Stephen Elop was a former employee of Microsoft. He was at the Head of the important ‘Business Division’ before Nokia hired him in September 2010 as a CEO. Therefore, Steve Ballmer and Stephen Elop knew each other. In September 2013, Stephen Elop returned to Microsoft as head of newly acquired handset business. Thus, the relationship between both ‘negotiators’ was strong and was great for doing business and found an agreement.

Vertical relationship: The mandate

As CEOs, Steve Ballmer and Stephen Elop were both allow negotiating directly with each other and taking crucial decisions. Therefore, both negotiators had the power to decide although all the terms of the agreement had to be granted by the board before any final decision.

Stakeholder Mapping:

        Main stakeholders are obviously Nokia and Microsoft. However, in this negotiation, they faced with other stakeholders, sometimes away from the table, which also had an interest in the deal.

        For example, the Finnish government: it was also interested in the process because with 150 years of history, Nokia is a part of Finland’s national heritage. Furthermore, there were employments at stake: more than 4,000 Finnish jobs spread in 3 factories were threatened by the acquisition.

        E.U. is also an institution away from the table but that can impede the negotiation if it does not give its regulatory approval.

        Moreover, Finland General Public was opposed to a deal that would profit to Nokia’s Shareholders. It was one of the reasons why the negotiations reached an impasse in 2011.

Finally, the main competitors such as Apple or Samsung could be stakeholders that can disturb the deal because they would be directly threatened if the acquisition was a success.

1. Problem – What?

Core motivations

        At the beginning the interest of both company were shared and compatible: Nokia wanted to sell its handset business and Microsoft wanted to enter into the handset business. There were both technology giants facing similar issues and competition, even if Microsoft was in a stronger position than Nokia.

        However, the strategies from both actors were different: Nokia had a distributive strategy, claiming their own share and more concerns about their own outcomes whereas Microsoft had an integrative strategy where the purpose was to create value for both companies. They also did not agreed on the pricing of the handset business as well as the ownership of HERE mapping service, very important for Nokia, which Microsoft wanted to acquire as well. The differences in their strategies led to an impasse on the acquisition talks.

Solutions at the table

        After this acquisition’s setback in 2011, Microsoft and Nokia had to find an alternative. Several solutions were brought at the table: if Microsoft couldn’t buy Nokia’s handset business, they had to find a way to work with Nokia. Thus, they offered Nokia a long-term strategic partnership in order to share their expertise: Nokia in hardware and Microsoft in software, as well as to share the production of Nokia-Windows’ smartphones and tablets. These solutions satisfied the need of resources for Nokia and the access to handset business for Microsoft.        

        Microsoft also required from Nokia to adopt Microsoft’s Windows Phone as their operating system, Bing as their search engine and adCenter for their advertising campaigns. Nokia agreed on these points and also agreed to bring its expertise in hardware design, language support and logistic with their distribution channels.

        Thanks to this partnership, Nokia hoped to reduce its R&D costs and to access key Microsoft’s assets (search, global advertisement, productivity, development, cloud computing and marketplace).

        Therefore, the solutions that Microsoft brought at the table led to a strategic partnership that temporarily satisfied the interests and needs of both companies.

        However, 2 years later, in January 2013, the partnership appeared to be a fail: Nokia’s global share decreased from 40% to 15% and Microsoft had to face with a ‘do or die’ situation to infiltrate the smartphone industry.  From this time, Microsoft decided to re-initiate the acquisition talks with Nokia.

Justifications

        The main argument for Microsoft to re-initiate the acquisition talks was the huge decrease in Nokia’s global share. This decrease was due to environment changes: the smartphone competition had drastically intensified and Nokia was now out-dated. The company was losing money on the handset business and Microsoft was ready to buy it anyway, to allow Nokia to get rid off it.