Mergers & Acquisitions Group 2 Presentation 12th of June

Deal to be analyzed: Microsoft - Nokia

Key points for the report (15-20 pages) and the presentation (25 min):

Introduction (n.a.) (1)

1. Description of the sector in which the M&A deal takes place, the year in which it was carried out
and references to other strategic alliances forged in the same period. (n.a.) (1)

2. Analysis of the acquiring company, explaining how it was formed, giving previous M&A
experience (if any), market position, etc. (Joshua) (2)

3. Analysis of the target company, explaining how it was formed, giving previous M&A experience (if
any), market position, etc. (Julia) (2)

4. Purpose of the deal: Here, one should reflect on the desirability of the deal between the two
companies at this juncture, analyzing each company’s aims in undertaking the operation. (Esther) (3)

5. Analysis of the deal: Who took the initiative? Valuation, exchanges, friendly versus hostile bids,
etc. (Oriana) (4)

6. Post-acquisition: This section covers the results of the operation, whether the deal was a success
or a failure and looks at corporate culture as well as financial aspects. (Claudia) (2)

Conclusion (n.a.) (2)

2. Analysis of the Acquiring Company - Microsoft

2.1. Origin of Microsoft

The Microsoft Corporation (MS) is an American multinational technology company that was founded
by Paul Allen and Bill Gates in 1975. MS develops, manufactures, licenses, supports and sells
computer software, consumer electronics, personal computers, and services. The company originally
began by developing and selling BASIC interpreters for the Altair 8800. It rose to dominate the
personal computer operating system market with MS-DOS in the mid-1980s, followed by Microsoft
Windows (Microsoft, 2018). The company's 1986 initial public offering (IPO), and subsequent rise in
its share price, created three billionaires and an estimated 12,000 millionaires among Microsoft
employees. Since the 1990s, it has increasingly diversified from the operating system market and has
made a number of corporate acquisitions.

Steve Ballmer replaced Gates as CEO in 2000, and later envisioned a "devices and services" strategy
(Blodget, 2013). This began with the acquisition of Danger Inc. in 2008, a company specializing in
hardware design, software, and services for mobile computing devices. This allowed MS to enter the
personal computer production market for the first time in June 2012 with the launch of the
Microsoft Surface line of tablet computers. Since Satya Nadella took over as CEO in 2014, the
company has scaled back on hardware and has instead focused on cloud computing, a move that
helped the company's shares reach its highest value since December 1999.

2.2. History of M&A Activity

Microsoft has engaged in 208 separate mergers and acquisitions to date, with the first acquisition
coming in 1987. A company called Forethought Inc. which was responsible for developing a
presentation program that we know today as Microsoft PowerPoint (Cochrane, 2004). A common
factor in Microsoft's acquisition history is how the purpose of the deal is to acquire new
technologies. Examples of this are visible in the next few deals to be mentioned.

Towards the end of 1997, Microsoft acquired Hotmail.com for $500 million, its largest acquisition at
the time, and integrated Hotmail into its MSN group of services (Reuters, 1998). Hotmail, a free
webmail service founded in 1996 by Jack Smith and Sabeer Bhatia, had more than 8.5 million
subscribers worldwide at that point in time.

Microsoft acquired the Seattle-based Visio Corporation in early 2000 for $1.375 billion. Visio, a
software responsible for developing the diagramming application software, Visio, which was
integrated into Microsoft's product line as Microsoft Visio after its acquisition. The deal was
structured as a stock swap (Seattle Times, 2000). Microsoft gave Visio shareholders 0.45 Microsoft
shares for each Visio share. Based on the value of Microsoft stock when the deal had been
completely finalised, the approximate value of the trade had risen to US$1.5 billion.

The first non-American based company acquisition to break the billion-dollar mark occurred in 2002
when Microsoft purchased Danish company Navision for $1.33 billion. The company, which
developed the technology for the Microsoft Dynamics NAV enterprise resource planning software,
was fully integrated into Microsoft as a new division named Microsoft Business Solutions, later
renamed to Microsoft Dynamics (Reuters, 2002). MS acquired the entire ordinary share capital of
Navision for a choice of 300 Danish kroner in cash or common stock per share.

Microsoft purchased aQuantive, an advertising company, in 2007 for $6.333 billion. Before the
acquisition, aQuantive was ranked 14th in terms of revenue among advertising agencies worldwide.
aQuantive had three subsidiaries at the time of the acquisition: Avenue A/Razorfish, one of the
world's largest digital agencies, Atlas Solutions, and DRIVE Performance Solutions (Kirk, 2007).
aQuantive became part of Microsoft's newly created Advertiser and Publisher Solutions (APS) Group.
During the 2007-2008 period, Microsoft added to their APS group with further acquisitions of Screen
Tonic, a French mobile advertising company, and Fast Search & Transfer, a Norwegian enterprise
search company for $1.191 billion to boost its search technology. These deals proved to be
unsuccessful, as in 2012 Microsoft wrote off almost the entire value of the aQuantive acquisition,
taking a $6.2 billion write-down. Microsoft's online advertising business had remained unprofitable
in the five years since it bought aQuantive (Goldman, 2012). In Microsoft's quarterly report, the
company stated that its online services division lost nearly half a billion dollars.

Microsoft attempted an acquisition of Yahoo Inc. in 2008 with the total offered price reaching $44.6
billion. However, this bid turned uncharacteristically hostile as the directors of Yahoo declined the
offer. The software giant even considered launching an exchange offer directly to Yahoo's
shareholders, inviting them to accept its cash and stock bid, although Yahoo's poison pill would stop
Microsoft gaining control without board-level support. Poison pills are defence mechanisms
companies put in place to fend off unwanted takeovers, typically working by giving shareholders the
ability to buy the stock at a bargain price in the event a predator buys a stake above a certain level.
That increases the number of shares of the target, diluting the percentage stake the predator holds
and making a bid prohibitively expensive. In 2001, Yahoo adopted a "stockholder rights plan" under
which if anyone buys 15 percent or more of its stock, aside from an agreed bid, shareholders have
the right to buy extra shares (Davies, 2008).

During the first quarter of 2011, Microsoft announced its acquisition of Skype Technologies, creator
of the VoIP service Skype, for $8.5 billion. With a value 32 times larger than Skype's operating
profits, the deal was one of largest acquisitions of the 2011 (Palmer, 2011). Skype became a division
within Microsoft, with Skype's former CEO Tony Bates becoming the division's first president.

Towards the end of 2016, Microsoft completed the planned acquisition of the professional
networking site LinkedIn for $26.2 billion. The deal was closed at a 50 percent premium on the
market price on the day of the announcement. The acquisition was structured so that LinkedIn
would remain a distinct brand and retain its current CEO, Jeff Weiner, who will subsequently report
directly to Microsoft CEO Satya Nadella (Greene, 2016).

2.3. Present Market Position

As of 2015, Microsoft is market-dominant in the IBM PC-compatible operating system market and
the office software suite market, although it has lost the majority of the overall operating system
market to Android (Keizer, 2015). The company also produces a wide range of other consumer and
enterprise software for desktops and servers, including Internet search (with Bing), the digital
services market (through MSN), mixed reality (HoloLens), cloud computing (Azure) and software
development (Visual Studio). Microsoft is best known for software products such as the Microsoft
Windows line of operating systems, the Microsoft Office suite, and the Internet Explorer and Edge
web browsers. Its flagship hardware products are the Xbox video game consoles and the Microsoft
Surface lineup of touchscreen personal computers. As of 2016, it is the world's largest software
maker by revenue, and one of the world's most valuable companies (Forbes, 2018).

3. Analysis of the target

3.1. Nokia’s business model

Nokia is a Finnish multinational company operating in the telecom, IT and consumer electronics
industries having a global presence with operations and R&D facilities in Europe, North America and
Asia, sales in approximately 130 countries, as well as an employment of around 55.000 people and
annual revenues of around €23bn. Only a small number of companies have a similar roller-coaster
story of transforming, developing and implementing new technologies in highly challenging market
circumstances as Nokia. The target transformed itself many times during its 150-year history. In the
late 90s, Nokia was the global leader in mobile phones for more than a 10-year period of time with a
market share of 40% until the industry shifted drastically.

In 2013, Nokia had four businesses: Networks, HERE, Devices & Services, and Technologies. For
financial reporting purposes Mobile Broadband and Global Services are accounted as the reportable
segments within Networks. The purpose of Mobile Broadband is to provide mobile operators with
radio and core network software together with the needed hardware to deliver mobile voice and
data services. Global Services is responsible to deliver a broad range of services, including network
implementation, care, managed services, network planning and optimization as well as systems
integration to mobile operators. HERE specializes in the development of location intelligence,
location-based services and local commerce. Devices & Services was largely comprised by two
business units: Smart Devices and Mobile Phones. Technologies focuses on intellectual property
rights and licensing activities.

3.2 Market position in 2013

Nokia first entered the telecommunications equipment market in 1960, when an electronics
department was created at Finnish Cable Works (subsidiary) to focus on the production of radio-
transmission equipment. The ongoing deregulation process of the European telecommunications
industries since the late 1980s has highly stimulated competition and boosted customer demand. In
the early 1990s, the strategic decision was made to make telecommunications the core business,
with the objective to establish leadership in every major global market. Consequently, basic industry
and all non-telecommunications operations were divested by the late 1990s. Eventually, in 1998,
Nokia has become the world leader in mobile phones, a position it enjoyed for more than a decade.

After the industry shift in the 2000s, the following years included various acquisitions and
divestments as well as revision of the strategic market position until Nokia was able to establish its
new core business and become the world’s leading company in network technologies, connected
devices, and communication innovations. The industry itself is characterized by fierce competition
coming primarily from the high customer bargaining power of only a few, but fairly strong
communication service providers (CSPs) that aim at limiting their number of suppliers. Further,
competition from Chinese low-cost providers, such as Huawei and ZTE, that have a moderate
bargaining power due to their size, is constantly putting pressure on prices. Therefore, Nokia and
other competitors pursue to offer a wide range of products since this constitutes a prerequisite in
order to increase chances of success and differentiation.

3.3 Previous M&A Experience

In order to both achieve and maintain its strategic position in the market, Nokia was engaged in
intense M&A activities throughout the past decades. In 1967, the current form of the target known
as Nokia Corporation was established as a result of the merger of Idestam’s Nokia AB, Finnish
Rubber Works, a manufacturer of rubber boots, tires, and other rubber products, and Finnish Cable
Works Ltd, a producer of telephone and power cables. Consequently, Nokia Corporation had five
distinct businesses: rubber, cable, forestry, electronics, and power generation.

As aforementioned, in the early 1990s, the firm took on a strategic turnaround which lead to the
divestments of both basic industry and non-telecommunications operations that included paper,
personal computer, rubber, footwear, chemicals, power plant, cable, aluminum and television
business between 1989 and 1996.

In 2006, Nokia, which had already started investing in its mapping capabilities for several years,
acquired Gate5, a mapping software specialist. In addition, the firm acquired NAVETEQ, the US-
based maker of digital mapping and navigational software two years later. As a result, today Nokia
still offers leading location services through the HERE business and brand, launched in 2012.

In 2007, Nokia combined its telecommunication infrastructure operations with the ones of Siemens
in order to form a joint venture named Nokia Siemens Networks. The joint venture, today known as
Networks, has managed to become a leading global provider of telecommunications infrastructure,
focusing on offering innovative mobile broadband technology and services.

In 2011, Nokia already joined forces with Microsoft to improve and strengthen its position in the
fairly competitive smartphone market. Therefore, Nokia adopted the Windows Phone operating
system for its smart devices. Throughout their strategic partnership, the two firms planned to
establish an alternative ecosystem to rival iOS and Android.

The year 2013 was again a strategic turning point for Nokia when it reinvented itself with another
major transformative transaction, which was the purchase of Siemens’ stake in the NSN. The
purchase price for Siemens’ stake was €1.7bn. The transaction was closed on August 7, 2013, making
NSN a wholly owned subsidiary of Nokia. The firm considered the transaction as an opportunity to
create more shareholder value for the group. Nokia had a clear view of NSN’s leadership in next
generation technologies, such as LTE, and additionally its impressive profitability improvement,
which was the outcome of the focused strategy on the company’s restructuring program.
Side notes (the sale from Nokia’s point of view):
- Networks also contained Networks Other, which includes net sales and related cost of sales
and operating expenses of non-core businesses, as well as the Optical Networks business
until May 6, 2013, when its divestment was completed.
- On August 7, 2013, Nokia completed the acquisition of Siemens’ stake in Nokia Siemens
Networks, which was a joint venture between Nokia and Siemens, and renamed the
company Nokia Solutions and Networks, also referred to as NSN
- after the closing of the Sale of the Devices & Services (reported as Discontinued Operations)
Business, NSN was renamed Networks
- Sale of the D&S Business is a significant transaction to Nokia - D&S generated, over the long-
term, a significant portion of our profits and cash, as well as net sales; the operations that
were transferred to Microsoft generated EUR 15.1bn, or approximately 50%, of Nokia’s net
sales for the full year 2012 and EUR 10.7bn, or approximately 46%, of Nokia’s net sales for
the full year 2013. The sale is expected to reduce the net sales significantly compared to
historical levels - there is no assurance that Nokia’s new strategic and operational focus will
succeed in replacing or improving upon the historical contribution of the D&S Business to
the consolidated results of operations → sale may lead to having less diversified portfolio of
businesses and may lead to reduced bargaining power with counterparties or reduced
relevance in the overall technology sector and, most specifically in the industries we operate

4. Purpose of the deal

4.1 Microsoft’s view

One major reason for the acquisition was that Nokia was the supplier of Windows Phones. As Nokia
was not able to reach profitability, the company considered to change its strategy by moving to
Android. That move would have meant that there was no supplier left to produce the Windows
phone, excluding Microsoft from the mobile business (ZDNet, 2016). Accordingly, the underlying
purpose of the acquisition is very similar to Google’s acquisition of Motorola Mobility, although
Google did not have to buy Motorola, but did so to obtain the patents (Dignan, 2013). According to
Jefferies analyst Lee Simpson it was a “double-or-quits” decision for Windows mobile business
(Dignan, 2013). Microsoft’s options were either to leave the mobile business, or to build it from
scratch, or to acquire Nokia. Simply continuing their partnership did not constitute a safe option, as
Nokia was likely to become bankrupt, and their original partnership contract would have expired in
2014 (Yarow, 2013). Furthermore, Microsoft regarded the provision of phones as crucial for its
strategy of providing a holistic solution to its customers across different devices with integrated
services (Vincent, 2013). This is aligned with Microsoft’s strategy of moving into “devices and
services” rather than the software sector, as the company was only provided the operating system
but not built mobile devices before the deal (Krantz, 2013).

Although, Windows Phones has always had a small market share (approximately 3.7% in 2013),
Microsoft has been enjoying a momentum of growth in 2013, reaching 7.4 million sold Nokia
Windows Phones in the second quarter of 2013 from zero in 2011 (Vincent, 2013). Accordingly,
Windows Phone was becoming the world’s number three mobile operating system with Nokia
accounting for the 82% of Windows Phone shipments. The acquisition of Nokia therefore posed an
opportunity for Microsoft to continue its momentum of growth, though the market share was
substantially below iOS and Android systems (Reed, 2013).

Besides, Microsoft expected to create synergies with their mobile division, due to Nokia’s
manufacturing capability as well as its extensive R&D, which both could support Microsoft’s mobile
business. The current profit margin of less than $10 per Windows Phone was expected to increase to
about $40 once the phones are produced in-house (Barrett, 2013; Singh, 2014). This improvement
would be reached among other reasons due to reduced transaction cost between the two
companies (Worstall, 2013).

Further synergies were expected due to Nokia’s distribution channels and relations with carriers
(ZDNet, 2016). Furthermore, greater intimacy and efficiency is expected to accelerate innovation
and executions, which should improve consumers’ experience especially by providing end-to-end
solutions (Lomas, 2014). Acquiring Nokia meant that hardware and software would be produced in-
house, which facilitates developers’ work with regard to fragmentation, security and software
updates. However, producing hardware and software in-house is certainly no guarantee for success,
as shown by the $900m write-down of Windows Surface tablets (Vincent, 2013).

In order to succeed in the mobile business, Microsoft was keen to acquire Nokia’s personnel,
including Nokia’s Design Team as well as Nokia’s CEO Stephen Elop, who had been one of Microsoft’s
top executives before (Barrett, 2013). Besides, Microsoft acquired 8,500 patents as well as the rights
to use Nokia’s brands Lumia and Asha (Worstall, 2013).

However, Microsoft was not only interested in Nokia’s smartphone capabilities. So called low-end
“Feature Phones” have also been of interest, as they constitute half of Nokia’s sales and the
smartphone market is slowly reaching saturation, which is reinforced by Apple providing the iPhone
5C. For Microsoft continuing to provide Nokia’s Feature Phones also poses an opportunity to acquire
more customers for mid-range phones, such as the Lumia 520 (Vincent, 2013).

A further reason for the deal includes tax advantages. The cash used for the acquisition was taken
from Microsoft’s $60bn offshore cash reserves that would be taxed, if repatriated to the US
(Timmons, 2013). Accordingly, using the cash did not have an impact on returning capital to
shareholders and it made sense for Microsoft to use this money to buy a foreign company instead of
repatriating it (Yarow, 2013).

4.2 Nokia’s view

4.3 Scepticism with regard to the desirability of the deal

7. Bibliography

Barrett, B. (2013, September 3). Why Microsoft Bought Nokia (And What It Means for You).
Gizmodo. Retrieved from https://gizmodo.com/why-microsoft-bought-nokia-and-what-it-means-for-
you-1244653272

Dignan, L. (2013, September 3).Microsoft's Nokia acquisition: It was 'double down or quit'. ZDNet.
Retrieved from https://www.zdnet.com/topic/the-microsoft-nokia-deal/

Keizer, G. (2015, July 8). Microsoft writes off $7.6B, admits failure of Nokia acquisition.
Computerworld. Retrieved from
https://www.computerworld.com/article/2945371/smartphones/microsoft-writes-off-76b-admits-
failure-of-nokia-acquisition.html

Krantz, M. (2013, September 3). Microsoft reaches $7.2B deal for Nokia handset business. USA
Today. Retrieved from https://eu.usatoday.com/story/money/business/2013/09/03/microsoft-buys-
nokia-handset/2756653/

Lomas, N. (2014, April 25). Microsoft’s $7.2BN+ Acquisition Of Nokia’s Devices Business Is Now
Complete. Tech Crunch. Retrieved from https://techcrunch.com/2014/04/25/microsofts-7-2bn-
acquisition-of-nokias-devices-business-is-now-complete/

Reed, B. (2013, August 7). Windows Phone shows signs of life while BlackBerry keeps crumbling.
BGR. Retrieved from http://bgr.com/2013/08/07/windows-phone-blackberry-market-share/

Singh, S. (2013, September 4). Microsoft-Nokia Deal: A Tale Of Desperation. tech-thoughts. Retrieved
from http://www.tech-thoughts.net/2013/09/microsoft-nokia-deal-tale-of-
desperation.html#.WwV6bi9aFE4

Timmons, H. (2013, September 3). Microsoft is funding its Nokia acquisition with cash it kept from
the taxman. Quartz. Retrieved from https://qz.com/120616/microsoft-is-funding-its-nokia-
acquisition-with-cash-it-kept-from-the-taxman/

Vincent, J. (2013, September 3). Four reasons why Microsoft had to buy Nokia. Independent.
Retrieved from https://www.independent.co.uk/life-style/gadgets-and-tech/features/four-reasons-
why-microsoft-had-to-buy-nokia-8796638.html

Worstall, T. (2013, September 8). The Real Reason Microsoft Bought Nokia. Transaction Costs.
Forbes. Retrieved from https://www.forbes.com/sites/timworstall/2013/09/08/the-real-reason-
microsoft-bought-nokia-transaction-costs/#312c108e3360

Yarow, J. (2013, September 3). There's A Simple, Boring, Tax-Based Reason Microsoft's Nokia
Purchase Makes Plenty Of Sense. Business Insider. Retrieved from
http://www.businessinsider.com/microsoft-nokia-cash-2013-9
ZDNet. (2016, February 13). Worst tech mergers and acquisitions: Nokia and Microsoft, AOL and
Time Warner. Retrieved from https://www.zdnet.com/article/worst-tech-mergers-and-acquisitions-
nokia-and-microsoft-aol-and-time-warner/

Microsoft. 2018. About Us. [Online] Available at: https://www.microsoft.com/en-us/about/people

[Accessed 24 May 2018].

Blodget, H. 2013. And Microsoft Is Giving Up On The Software Business! Business Insider Australia.
[Online] Available at:
https://www.businessinsider.com.au/microsoft-device-and-services-2013-8 [Accessed 24 May
2018].

Cochrane, N. 2004. Vision of the future. The Independent. [Online] Available at:
https://www.theage.com.au/articles/2004/05/10/1084041320078.html [Accessed 24 May 2018].

ThomsonReuters. 1998. Microsoft Corp acquires Hotmail Corp. Thomson Financial Mergers &
Acquisitions. [Online] Available at:
https://web.archive.org/web/20090803090425/http://www.alacrastore.com/storecontent/Thomso
n_M%26A/Microsoft_Corp_acquires_Hotmail_Corp_Microsoft_Corp-715327020 [Accessed 24 May
2018].

Seattle Times. 2000. $1.5 billion Visio purchase complete, Microsoft says. [Online] Available at:
http://community.seattletimes.nwsource.com/archive/?date=20000108&slug=A20000109010015
[Accessed 24 May 2018].

Reuters 2002. Microsoft Corp launches a tender offer for Navision A/S. Thomson Financial Mergers &
Acquisitions. [Online] Available at:
https://web.archive.org/web/20090804192107/http://www.alacrastore.com/storecontent/Thomso
n_M%26A/Microsoft_Corp_launches_a_tender_offer_for_Navision_A_S-1291085040 [Accessed 24
May 2018].

Kirk, J. 2007. Microsoft to Buy aQuantive for $6 Billion. IDG News Service. [Online] Available at:
https://www.pcworld.com/article/131991/article.html [Accessed 24 May 2018].

Goldman, D. 2012. Microsoft's $6 billion whoopsie. CNN MoneyTech. [Online] Available at:
http://money.cnn.com/2012/07/02/technology/microsoft-aquantive/index.htm [Accessed 24 May
2018].

Davies, M. 2008. Yahoo has poison pill defense at disposal. Business News. [Online] Available at:
https://www.reuters.com/article/us-yahoo-microsoft-pill/yahoo-has-poison-pill-defense-at-disposal-
idUSN0143636120080201 [Accessed 24 May 2018].

Palmer, M. 2011. Skype price raises fears of new tech bubble. Financial Times. [Online] Available at:
https://www.ft.com/content/2e142854-7b2a-11e0-9b06-00144feabdc0#axzz1LtCJH6ph [Accessed
24 May 2018].
Greene, J. 2016. Microsoft to Acquire LinkedIn for $26.2 Billion. Wall Street journal. [Online]
Available at:
https://www.wsj.com/articles/microsoft-to-acquire-linkedin-in-deal-valued-at-26-2-billion-
1465821523 [Accessed 24 May 2018].

Keizer, G. 2015. Microsoft gets real, admits its device share is just 14%. [Online] Available at:
https://www.computerworld.com/article/2490008/microsoft-windows/microsoft-gets-real--admits-
its-device-share-is-just-14-.html [Accessed 24 May 2018].

Forbes. 2018. The World's Biggest Public Companies. [Online] Available at:
https://www.forbes.com/global2000/list/ [Accessed 24 May 2018].