Shares in Microsoft tumble on deal with Nokia

Shares in Microsoft fell by almost 5 per cent in early morning trading, as the software giant announced it is to acquire Nokia's phone business and license its patents for €5.44 billion ($7.2 billion), making its boldest foray yet into mobile devices. Nokia rallied  42 per cent to €4.21, its biggest gain since at least 1991, on the back of the deal which will bring Nokia chief executive Stephen Elop back into the Microsoft fold.

Mr Elop, a former Microsoft executive, will return as Microsoft's board ponders a successor to current chief executive Steve Ballmer, who will depart sometime in the next 12 months after initiating a reorganization intended to transform the software company into a devices and services group in the mould of Apple.

The sale of Nokia's phone business marks the exit of a 150-year-old company that once dominated the global cellphone market and remains one of Europe's premier technology brands, even though Apple and Samsung Electronics' ascendancy all but reduced it to irrelevancy in Asia and North America in recent years.

"For a lot of us Finns, including myself, Nokia phones are part of what we grew up with. Many first reactions to the deal will be emotional," said Alexander Stubb, Finland's minister for european affairs and foreign trade, on his Twitter account.

The sale price of the phone business, at about one-quarter of its sales last year, represented a "fire sale level," according to analyst Tero Kuittinen at consultancy Alekstra, although others disagreed on pricing.

"What should be paid for declining business, where market share has been constantly lost and profitability has been poor?" said Hannu Rauhala, an analyst at Pohjola Bank. "It is difficult to say if its cheap or expensive."

Nokia - reduced to its networks business, navigation offerings and patent portfolio after the sale - is still the world’s second largest phone maker behind Samsung, but it is not in the top five in the more lucrative and faster-growing smartphone market.

Sales of Nokia's Lumia series have helped the market share of Windows Phones in the global smartphone market climb to 3.3 per cent, according to consultancy Gartner, overtaking ailing BlackBerry for the first time this year. Still, Google Inc's Android and Apple's iOS system make up 90 per cent of the market.

Mr Elop, hired from Microsoft in 2010, has been cited among the frontrunners to take over from Mr Ballmer, criticised for missing the mobile revolution, kicking off Microsoft’s foray into the market with the tepid-selling Surface tablet only in 2012.

Buying Nokia’s gadget business thrusts Microsoft deeper into the hotly contested market, despite some investors urging the company to stick to its core strengths of business software and services.

Activist fund manager ValueAct Capital Management, which has been offered a board seat, is among those concerned with Ballmer’s leadership and his attempts to plough headlong into the lower-margin, highly competitive mobile devices arena.

The San Francisco-based fund, which manages about $12 billion for clients, owns 0.8 per cent of Microsoft’s shares.

Others applauded Ballmer’s aggressive gambit.

"Microsoft cannot walk away from smartphones and the hope that other vendors will support Windows Phone is fading fast. So buying Nokia comes at the right time," said Carolina Milanesi, an analyst at Gartner.

“In today’s market it is clear that a vertical integration is the way forward for a company to succeed. How else could Microsoft achieve this?”

As part of Microsoft, Mr Elop will head an expanded Devices unit. Julie Larson-Green, who in July was promoted to head a new Devices and Studios business in Ballmer’s reorganisation, will report to Mr Elop when the deal is closed.