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Summary:

After years of playing footsie — in a game that accelerated over the past 12 months — Microsoft and Nokia finally pulled the trigger on a $7.2 billion deal. What changed in the past month?

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photo: julianlim

Microsoft and Nokia have been best phone buddies since they announced an alliance in early 2011. And, Nokia’s board met more than 50 times in the past year to discuss the deal that was announced late Monday night —  Microsoft is buying Nokia’s phone business for $7.2 billion.

Two weeks ago Microsoft CEO Steve Ballmer said he’ll cede the CEO slot within 12 months; a week later Microsoft announced that it was giving shareholder activist ValueAct a seat on the board. So the question is, after all the maneuvering and chitchat:  Why now?

Maybe this is Ballmer’s last hurrah — with Nokia in the house he can say Microsoft is a device, as well as a services company — a  cornerstone to a reorg he orchestrated and announced in July. With Nokia smartphones under Microsoft’s control, the company is a real player in mobile phones — albeit one that’s playing catchup to market leaders Android and iPhone.

Some argue that by finally bringing mobile phones in-house along with its existing tablet business, Microsoft has a consumer device business that it could spin-off into a separate company, a break-up some have advocated, and which would kill that reorg in its cradle. Update: On Tuesday’s conference call, Ballmer said the “reorg is absolutely intact”  and that Julie Larson-Green who heads up the new devices business will work with Elop. In an earlier memo, Ballmer wrote that Larson-Green will report to Elop.

Where’s ValueAct in all this?

My biggest question is what role, if any, ValueAct had in this arrangement. The company will get a seat on the board starting at the next board meeting and has also been promised access to “selected” Microsoft board members but as to any input it had here? It is a mystery. Update:  Speaking on Tuesday’s conference call, Microsoft General Counsel Brad Smith said ValueAct was not consulted in advance on the Nokia deal.

Microsoft said in a conference call Tuesday that under the old arrangement it makes 10 percent gross profit on phones, but will reap 40 percent gross profit if it owns the devices.

The Stephen Elop factor

Stephen Elop, NokiaThere have been conspiracy theories ever since Stephen Elop left Microsoft, where he led the company’s business applications division, to become Nokia CEO in 2010. Folks saw him as a “sleeper agent” inside Nokia, whose goal was to align the mobile phone pioneer with Microsoft’s phone strategy. The 2011 deal gave some credence to those skeptics. Now Elop rejoins Microsoft as head of the Microsoft Devices group.

Elop’s name has been on the short-list of potential Ballmer replacements for the past year. When he left Microsoft it was after Ballmer said he planned to stay on the job another 10 years but Elop remained on good terms with Ballmer and the rest of management.

If the end game of this transaction was to get Elop back in the house, he’s the most expensive hire in corporate history.

The deal does make Elop the “odds-on favorite” to become next CEO, said a former Microsoft VP who requested anonymity. But it also prompts questions. “Where is he most valuable? Running mobile phones or being CEO? If he becomes CEO, does that put the impact of the acquisition at risk?”

And, where does this whole acquisition leave Ballmer’s reorg. “Do they really want the Windows Phone OS in a different group than hardware and the business? They need an integrated product,” the former VP said via email.

Oh, and this exec, as if channeling Kevin Tofel’s analysis, added: After this purchase “….you can forget about any other OEMs selling Windows Phones,” he added.

This story was updated at 6:54 a.m. PDT September 3 with Brad Smith’s statement regarding ValueAct and information on Julie Larson-Green and Stephen Elop’s roles going forward.

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  1. Now because Lumia sales are accelerating ,later they would have have payed more.

  2. It was reported earlier that Microsoft would still outsourcing to other vendors

  3. I worked on the Nokia Intellisync server for several years. At the time it didn’t seem to me that Nokia knew much about mobile device management or deployment. Perhaps they’ve learned something since then…but I doubt it.

    Only a small part of a successful mobile strategy is about the phones or devices, and Nokia never got it. Microsoft may have just bought a pig in a poke.

    –Steve

  4. Thanks for this article. I don’t think Elop has been doing Nokia any favors. From everything I’ve read about the Lumia series of phones, it sounds like they have fantastic hardware that’s been crippled by being stuck on Windows Mobile, an OS with a relatively small app ecosystem. If Nokia made Android phones, there’s a good chance I would buy one next month when I’m due for upgrade. As it stands, I’m not even considering them.

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