Microsoft And Nokia

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 |  About: Microsoft Corporation (MSFT), NOK
by: Julie Young

Summary

Microsoft's acquisition builds on partnership.

The Transaction approval period causes speculation on direction of the businesses.

Successful completion of transaction and effective integration of the new phone business will benefit shareholders.

Microsoft (NASDAQ:MSFT) announced its acquisition of Nokia's phone business in September 2013. Through the transaction, Microsoft also intends to acquire key patents and licenses that will be used with phones and other Microsoft products.

The global nature of the Microsoft and Nokia businesses has led to a lengthy regulatory approval list. In comments from Microsoft's announcement of the acquisition key regions and countries noted for regulatory approval included the European Union, United States, China, India, Brazil, Russia and Canada, while a number of other international approvals are also required.

The acquisition, which was announced in September 2013, had an expected closing of early 2014 and is likely to close around the end of Microsoft's 3Q14. The lengthy closing time has allowed a great deal of speculation as to how the Nokia phone business will be integrated into Microsoft and also how the direction of Nokia's mobile phones will change.

Nokia's X phone lines were spotlighted at the 2014 Mobile World Congress. The Nokia X, X+ and XL are included in the Nokia X phone line and contain the Google Android operating system. The Nokia Asha and Lumia Windows phones were not featured at the Mobile World Congress, however developments on these phones still continue.

Microsoft's long-term partnership with Nokia has always been centered on building Nokia phones with innovative Windows systems and services. The acquisition takes the partnership one step further by integrating Nokia's phone business with Microsoft's consumer hardware products, allowing Microsoft to enter and gain market share in emerging and developing countries. A number of changes have taken place at Microsoft since the announcement of the acquisition, including new business segment reporting and a new CEO, however the core principles of the acquisition still appear to remain the same.

Satya Nadella's appointment of Stephen Elop, Executive Vice President of Nokia Devices and Services, to leader of Microsoft's Devices and Studios Group shows Microsoft's continued commitment to the acquisition, partnership and integration of all components of Nokia's business processes. Elop will manage Xbox and Surface. The Nokia phone business will also be integrated within the Devices and Studios Group. Current leader of the group, Julie Larsen-Green will remain head executive of the group until the Nokia acquisition is completed.

Key areas of regulatory approval for the Microsoft-Nokia transaction are currently China and Taiwan. In China, Google (NASDAQ:GOOG) and Samsung have requested terms be included that would prevent Nokia's patent licensing fees from increasing. In Taiwan, the Taiwan Fair Trade Commission conditionally approved the transaction with limitations on patent licensing fees.

Once the closing occurs, the effects of the acquisition will primarily be seen in Microsoft's Devices and Consumer business segment having the greatest impact within Hardware and Licensing. The transaction, led by former CEO Steve Ballmer, will help Microsoft in a number of ways. In management's initial comments on the acquisition, Microsoft reported it would be accretive by fiscal year 2015, adding $7 million to net income in 2015 and $0.08 to earnings per share in 2016 on a non-GAAP basis. Management also reported potential revenue for the newly acquired business of $45 billion in 2018, helping Microsoft improve its smartphone market share to 15%. After the completion of the acquisition, Microsoft will have one of the industry's leading patent portfolios for smart devices, and the new phone business will also help Microsoft gain additional insight into the mobile operating system marketplace.

Nadella's intentions for the integration of the Nokia business appear to be in line with the company's original comments and integration plan. While enterprise and cloud services are among his key priorities, he has expressed his ongoing interest in the Devices and Consumer Hardware business and its contribution to Microsoft's comprehensive product offering. If the transaction closes as expected and the acquisition is effectively integrated, it should have positive effects on the company as a whole and the Devices and Consumer business specifically, improving value for shareholders in the near-term and long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.