Investors react sharply to Microsoft-Nokia deal

UPDATE Sept 4: Microsoft shares [NAS: MSFT] were down 5.5% in late trading on the Nasdaq, while Nokia [NAS:NOK] was up by 30.7%

It was investor's first chance to react to the news that Microsoft will buy Nokia's phone business for €5.4 billion ($US7.2 or $NZ9.1 billion).

"Mr Flop"
"Some have suggested that Stephen Elop was a Trojan horse that Microsoft had placed in Nokia with the aim of driving down the stock price so Microsoft could buy the company cheap," says John Strand of Strand Consult.

Mr Strand says the theory is bogus, but neverthless tartly notes that Nokia's share price halved between the time Mr Elop left Microsoft to become Nokia CEO in September 2010, and the yesterday  when the buyout was announced.

The UK analyst labels him "Mr Flop ... a man of big words and many promises but few results."

Like others, Mr Strand sees Microsoft buying Nokia's handset business as an insurance policy to keep its Windows Phone software alive. With other handset makers showiing little and declining interest, it was essential to keep Nokia - which made 81% of Windows phones sold last quarter, according to IDC - in the Microsoft corner. 

Contrasting financial fortunes
It's easy to see why Nokia shareholders are happy to find a white knight, while Microsoft investors are more dubious.

Nokia has been struggling for years as its handset business has been punished by the rise of Apple and Android, and its telecommunications infrastructure business has faced cut-price competition from China's fast-rising Huawei.

In its June quarter, a slow down in "feature phone" or basic phone sales contributed to a 24% crash in total revenue to to €5.7 billion. Analysts had expected €6.8 billion.

The second-quarter net loss narrowed to €227 million from €1.4 billion a year earlier. Analysts projected a loss of €258.8 million.

One silver lining was that the Finnish phone maker sold 7.4 million phones in its Windows-based Lumia series, a 32% increase from the prior quarter.

The Lumia line now outsells Blackberry's entire phone lineup, from it's slow selling Z10 down - helping to establish Microsoft's Windows Phone as the firm number three platform in the smartphone market, if some distance behind Google's Android and Apple's iOS (leading Android phone maker Samsung sold 64.7 million smartphones in the second quarter and Apple 38.3 million iPhones in the first quarter).

The company hopes its recently previewed Lumia 1020, which features a 41 megapixel camera, will continue the line's momentum - even as users go crazy for the low-fi Instagram app (so far no available for Windows Phone).

Another bright spot: the company's mobile network infrastructure business (from which it recently bought out partner Siemens) was in the black.

Elsewhere, the news was all bad.

Nokia sold 61.1 million mobile devices in the quarter, down from 83.7 million a year ago and 113.5 million at the end of 2011, when Stephen Elop joined as CEO (from partner Microsoft) and Nokia first started selling Windows Phone-based handsets.

Microsoft, by contrast, has remained a cash machine. Despite struggling to make headway in the smartphone market - and taking an embarrassing $US900 million write-down on its slow-selling Surface - the company still made a $US4.96 billion profit during the three months to June 30. Revenue increased 10% agaisnt the year ago quarter to $US18.06 billion.

New CEO speculation as Microsoft buys Nokia's phone business for €5.44b

Sept 3: Microsoft has entered an agreement to purchase all of Nokia's Devices & Services business, license Nokia's patents, and license and use Nokia's mapping services.

Under the terms of the agreement, Microsoft will pay €3.79 billion to purchase substantially all of Nokia's Devices & Services business, and €1.65 billion to license Nokia's patents, for a total transaction price of €5.44 billion in cash. 

The deal is subject to regulatory approval, and is expected to close in the first quarter of next year.

Last month, Nokia bought out Siemens' 50% stake in Nokia Siemens Networks for €1.7 billion. If the device-focused deal announced today goes ahead, it will leave Nokia focussed on mobile telecommunications infrastructure.

Ahead of the deal, industry rumours were swirling that Nokia CEO Stephen Elop will return to Microsoft as CEO, replacing Steve Ballmer who recently said he would quit within in a year.

Now, he has emerged as analysts' favourite (and bookies' too), though in the immediate future he will serve as head of an expanded Microsoft devices division that will include most of the staff merged from Nokia.

Mr Elop left Microsoft to become CEO of Nokia in September 2010.

His move sealed a $US1 billion marketing pact between the two companies that saw Nokia move many of its smartphones to run on Microsoft's Windows Phone software.

The pact increased Microsoft's share of the smartphone market. While still in single digits, Windows Phone devices have moved into a clear third place ahead of BlackBerry - even if the platform is still far behind market leaders Apple and Android.

Nokia dominates sales of Windows Phone devices, according to IDC with 82% share, but domination of that subcategory has not been enough to stop the long-time world number one falling behind Samung in total phone sales.

The Microsoft-Nokia deal indicates Microsoft will double-down on its recent policy of making its own hardware, such as the slow-selling Surface tablet.

RAW DATA: Presentation - Microsoft Explains The Rationale Behind The Nokia Deal