Microsoft to Buy Nokia’s Device Business in Deal Worth $7.17 Billion

Microsoft announced late Monday that it is buying the majority of Nokia’s cellphone unit for 3.79 billion euros ($5 billion), and spending another 1.65 billion euros ($2.18 billion) to license Nokia’s patent portfolio, for a total of 5.44 billion euros ($7.17 billion).

Once the deal is done, a number of Nokia executives will join Microsoft, including Stephen Elop, a former Microsoft executive who is seen as among the top contenders to replace outgoing CEO Steve Ballmer. Also set to join Microsoft are Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber.

For now, Elop is stepping aside as Nokia CEO to become executive VP of devices and services. Nokia Chairman Risto Siilasmaa will serve as interim CEO.

“For Nokia, this is an important moment of reinvention, and from a position of financial strength, we can build our next chapter,” said Siilasmaa “After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders.”

The move is a clear sign that Microsoft believes it can and must succeed in the phone business, and that it cannot afford to leave the success in the hands of a partner — even one like Nokia — that had bet its future on Microsoft’s phone software.

Nokia agreed in February 2011 to make Windows Phone its primary play in smartphones, and their mobile fortunes have already been closely tied. So far, the combination has managed to pass BlackBerry, but remains a distant No. 3 platform to Google’s Android and Apple’s iOS.

“Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services,” Ballmer said in a statement. “In addition to their innovation and strength in phones at all price points, Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.”

Microsoft will dip into its large overseas cash holdings to finance the deal. At the close of the deal, roughly 32,000 employees are expected to transfer to Microsoft, including 4,700 in Finland. Nokia has about 56,000 employees not expected to transfer to Microsoft, as of the end of the second quarter.

Nokia is also selling its non-Windows Phone device business, including its basic phones and its Asha line (which are advanced feature phones or entry-level smartphones, depending on one’s perspective).

As for Nokia, while it is selling its most well-known business to Microsoft, the company will focus on its businesses making cellular networking equipment, its Here location-based services, and other “advanced technologies.”

The remaining businesses account for about half of the company’s 2012 sales.

As part of the deal, Nokia will grant Microsoft a 10-year non-exclusive license to its patents. Microsoft will license Nokia reciprocal rights to its location-based patents. Microsoft will have the option to extend the patent deal in perpetuity.

Microsoft will also license Nokia’s Here platform, and will become one of that unit’s biggest customers, paying a separate license agreement.

Microsoft has also “agreed to make immediately available to Nokia EUR 1.5 billion of financing” in three separate convertible bond deals. Nokia has the option whether to draw down some or all of the bonds. If the deal closes, any of the exercised bonds will be redeemed from the deal proceeds.

Nokia plans to hold an “Extraordinary General Meeting” of shareholders on Nov. 19. The companies said they expect the deal, which is subject to approval of Nokia shareholders and regulatory approval, to close in the first quarter of 2014.

Correction: An early version of this story incorrectly stated the U.S. dollar amount that Microsoft is spending to acquire a license to Nokia’s device-related patents. That amount is $2.18 billion. Also, Microsoft is spending 3.79 billion euros to acquire Nokia’s device business.