Microsoft in $7 Billion Deal for Nokia Cellphone Business

September 2, 2013, 11:51 p.m. ET

Microsoft in $7 Billion Deal for Nokia Cellphone Business

SHIRA OVIDE

Microsoft Corp. MSFT -0.45% struck a $7 billion deal to acquire Nokia Corp.’sNOK1V.HE +1.30% core cellphone business, a bold move to try to catch up in a fast-growing mobile business that is now dominated by Samsung 005930.SE -0.44% andApple AAPL -0.91% . The deal comes on the heels of announcing the planned retirement of Microsoft Chief Executive Steve Ballmer. As part of the deal for the devices-and-services business, Microsoft will bring aboard several executives who could be contenders for Mr. Ballmer’s job.The companies said late Monday that Microsoft will pay €3.79 billion to buy “substantially all” of the Nokia business, which includes its smartphone operations. The Redmond, Wash., company will also pay €1.65 billion to license Nokia’s patents, the companies said, bringing the deal to €5.44 billion, or $7.18 billion.

Stephen Elop, Nokia’s CEO, and several other executives are joining Microsoft as part of the deal. Mr. Elop, a former Microsoft executive, is among the names being circulated as Mr. Ballmer’s successor. Microsoft recently announced that Mr. Ballmer will retire from his post within a year, or when the next CEO is chosen.

Nokia was already Microsoft’s closest partner in smartphones, with the Finnish company one of the biggest supporters of Microsoft’s phone software.

The deal with Nokia is an apparent acknowledgment that Microsoft needs a stronger hand to play in the mobile-phone business, where it is playing catch-up to Apple Inc. and Google Inc.GOOG -1.00% Microsoft’s lagging position in mobile is one of the most serious threats Mr. Ballmer’s successor will need to tackle. The deal also is a recognition by Nokia that it is better to sell off its smartphone business than take on rivals like Apple on its own.

“Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing,” the companies said in a joint press statement. Nokia said the deal with Microsoft will improve its financial position and “provide a solid basis for future investment in its continuing businesses.”

The Wall Street Journal reported in June that Microsoft and Nokia had discussed a sale of Nokia’s mobile-phone business but the talks fell apart over the price of the transaction.

The companies said Microsoft is expected to use its stockpile of overseas cash to pay for the Nokia purchase and licensing pact. Microsoft and Nokia said the transaction is expected to close in the first three months of 2014, subject to approval by Nokia shareholders and other conditions.

Microsoft’s market share in smartphones is about 3% world-wide, according to comScore.

“For Microsoft, this is a bold step into the future,” Mr. Ballmer said in a note to employees. Mr. Ballmer has been reworking Microsoft around what he calls a “devices and services” strategy—a vision of Microsoft not only producing the software underlying many computing devices, but being more responsible for the personal-computers, smartphones and hardware gear on which people and businesses rely.

Mr. Ballmer’s strategy, however, has been hamstrung by Microsoft’s weak position in smartphones that are reshaping the technology battleground by minting new winners like Apple, Google and Samsung Electronics Co. As once dominant tech companies—including Microsoft and Nokia—have slipped behind the smartphone leaders, their future growth prospects have become clouded.

Nokia’s market share and market value have tumbled during the tenure of Mr. Elop, who took over in 2010. Last year, Nokia generated nearly half of its €30.2 billion in revenue from its mobile-phone segment.