Mergers and

-- Microsoft Nokia
Acquisitions
Deal -GROUP 7
Prerit Nagori - 035
Jaldip Patel - 043
Anup Nair - 036
Debabrata Nanda - 037
Das Flavian Allen Kunal Anthony
-109
Shashi Dhar - 117
Swati Grover - 124

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Sectoral conditions Predeal

Nokia had the largest share of
the mobile phone handset
market until it was overtaken
by
Samsung
in
2012,
according to data compiled by
Bloomberg.
Microsoft was deepening a
push
into
hardware
as
dwindling computer sales sap
demand for the programs that
made it the worlds largest
software maker.

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Sectoral conditions Predeal

Nokias sales increases to about 30000 pieces in 3rd quarter of 2010 and
decreased thereafter to less than 5000 in 3rd quarter of 2013.
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Microsoft Corporation (commonly

referred to as Microsoft) is an
American multinational technology
company headquartered in
Redmond,Washington,

Develops, manufactures, licenses,

supports and sells computer
software, consumer electronics and
personal computers and services.

Best known software products are the

Microsoft Windows line of operating
systems, Microsoft Office office suite,
and Internet Explorer and Edge web
browsers.

World's largest software maker by

revenue, and one of the world's
most valuable companies

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Business Details:
Microsoft
Devices and Consumer
(D&C)
D&C Licensing
Computing and Gaming
Hardware
Phone Hardware
D&C Other

Commercial
Commercial Licensing
Commercial Other

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Business Details:
Microsoft

On September 28, 2015, Microsoft announced changes in the reporting of its

financial results. Microsoft consolidated six operating segments into three.

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Financials: Microsoft
Year Ended June
30,

2015

2014

Revenue

$93,580

$86,833

Gross margin

$60,542

$59,755

Operating income

$18,161

$27,759

Net income

$12,193

$22,074

Diluted earnings per

share

$1.48

$2.63

Cash dividends declared

per share

$1.24

$1.12

Cash, cash equivalents,

and short-term
investments

$96,526

$85,709

Total assets

$176,223

$172,384

Long-term obligations

$46,282

$36,975

Stockholders' equity

$80,083

$89,784

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Nokia is a Finnish multinational

communications corporation
Founded in 1865

Engaged in the production of mobile

devices and in converging Internet
and communications industries

Main purpose of the company was

To connect people

Owned production centers in various

countries: Finland, Germany, Great
Britain, Hungary, Romania, China, India,
Mexico and South Korea

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Business Details:
Nokia
Networks
Mobile Networks
Fixed Networks
IP/Optical Networks
Applications and Analytics

Nokia
Technologies
Digital Health
Digital Media
Patent Licensing

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Financials: Nokia

DEAL OVERVIEW
Deal Date : September 2, 2013
Deal Value : $7.2 billion (Including patents)
Microsoft will spend $5 billion (3.79bn) on the phone-making unit, and
$2.17 billion (1.65bn) on licensing Nokia's patents.
Microsoft will take over Nokia's Devices and Services business, which
includes both Smart Devices and Mobile Devices
8,500 of Nokias design patents
Nokia will retain its patent portfolio
Microsoft tolicense another 30,000 "utility" patents from Nokia for ten
years

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Reasons for the Deal

For Microsoft
Unifying hardware & Software

To accelerate its share and profits in phones

To keep its momentum

Large financial opportunity fueled by growth in
Smartphone business
Cost reduction

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Reasons for the Deal

For Nokia
Declining revenues

Increased competition by Android & iOS

Past association with Microsoft

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Deal Attractiveness
Expansion into mobile manufacturing
Emerging markets
The low end theory
Talent Acquisition
Use of overseas cash

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Deal Financials
Microsoft bought
Nokias Devices
business

License Nokias
intellectual property$2 Billion

Total cost of deal $7.2 Billion

Liabilities assumed $0.2 billion

Nokia Devices Business $5

Billion

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Acquisition Cost $21 Million

JPMorgan Chase & Co. advised

Nokia on the transaction, while
Goldman Sachs Group Inc. worked
with Microsoft

Deal
Financia
ls

Sales & Marketing

expenses increased
by $394 million due
to NDS

R& D expenses in
NDS increased by
$665 million

Revenue increased
$2.0 billion due to
NDS

Cost of revenue
increased $1.9
billion due to NDS
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Financial Highlights Microsoft

2015
Year Ended June 30,

2015

2014

Revenue

$93,580

$86,833

Gross margin

$60,542

$59,755

Operating income

$18,161

$27,759

Net income

$12,193

$22,074

Diluted earnings per share

$1.48

$2.63

Cash dividends declared per share

$1.24

$1.12

Cash, cash equivalents, and short-term

investments

$96,526

$85,709

Total assets

$176,223

$172,384

Long-term obligations

$46,282

$36,975

Stockholders' equity

$80,083

$89,784

Synergy in the Deal

COST SYNERGIES
Cost Synergies in the Microsoft-Nokia deal were mainly based on
reduction in the operating expenses.
Cost of Revenues: Cost reduction in the Devices and Consumer
segment
Sales & Marketing: Reduction in Nokias sales and marketing
expenses due to strong Microsoft marketing support. Microsoft
adCenter provided search advertising services on Nokias line of
devices and services.
Research & Development: Microsofts long-term approach to R&D
was considered one of the main keys to success, the convergence of
strengths by Microsoft and Nokia lead to significant cost saving
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Synergy in the Deal

REVENUE SYNERGIES
Revenue synergies were achieved through a combination of different
functional strengths.
Windows & Windows Live Division:
WWLD was the second largest Microsoft segment by revenues. With
the launch in 2012 of the Windows 8, this segment was to perform will
be perpetually higher from 2012 onwards
Nokia Siemens Networks:
A joint-venture between Nokia and Siemens in order to provide
sophisticated telecommunications hardware, software and professional
services. NSN in combination with Microsoft Business Division was
seen to attract more developers and further help in providing a wide
range of applications and services on different platforms
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Value of Synergies
The total value of synergies estimated for the consolidation of Microsoft and Nokia
was $8.396 Billion USD. The integration costs amounted to $3.095 Billion USD thereby
making the value of net synergy $5.301 Billion USD. Breakup of synergies is as
follows(All fig are in $ Millions)

Value of Synergy

% of Total
Synergies

Revenue Synergies
Windows & Windows Live
Division
Nokia Siemens Networks
Total

952
882
1,184

11%
10.50%
22.50%

Cost Synergies
Cost of Revenues
Sales and Marketing
Research & Development
Total
Total Value of Synergies

3,578
1,572
1,362
6,512
8,396

42.50%
19%
16%
77.50%
100%

Integration Costs

3,095

Total Net Synergies

5,301

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Valuation of Merged Entity with

Synergies
The Valuation of Merged Entity with Synergies can be computed by addition of values
of the Valuation of Merged Entity without Synergies with Value of Synergies

Valuation of Merged Entity with Synergies

Discounted Cash Flow

(DCF)

(All fig are in $

Millions)

New Firm Value

without synergies

281,067
286,368
5,301

Market Capitalization (billions of

dollars)

255,256

Equity Value

278,008

Net Debt (millions)

5,756

Minority interest

2,604

Enterprise Value

286,368

New Firm Value with

synergies

Upside Potential

9%

Value of Synergies

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Sectoral Conditions PostDeal

No significant reaction from competitors in innovations, product launches,
strategic decisions post-deal
Poor app ecosystem compared to competitors
Failure to attract developer and carrier partnerships due to insignificant user
base
Competition in the industry had shifted to gaining market share in the
ecosystem rather than just the devices
Vertical integration in software and hardware business units/ strong
collaborations
Overall a poor performance post deal

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Sectoral Conditions PostDeal

Market Share OS
Android
87.60%

iOS

Windows Phone

84.80%

82.80%

Others
79.80%
69.30%

11.70%
0.40% 0.30%
2016 Q2

13.90%
2.60% 0.70%
2015 Q2

11.60%
2.50% 1.10%
2014 Q2

12.90%
3.40% 3.90%
2013 Q2

16.60%

11.00%

3.10%
2012 Q2

The worldwide smartphone market grew 0.7% year over year in 2016Q2, with 344.7
million shipments, according to data from the International Data Corporation
Android dominated the market with an 87.6% share in 2016Q2. Samsung reasserted
its global leadership with the success of its new flagship devices
In Q2 2015, Microsoft managed to sell only 9 million Windows phone as compared to
48 million iPhones sold by Apple
While in Q2 2016, Microsoft managed to sell only 2 million Windows phone as
compared to 40 million iPhones sold by Apple. Android phones taking the majority of
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Legal Issues in the

Deal
U

Ministry of Commerce
of Peopleas Republic of
China

South Koreas Fair

Trade Commission

Competition
Commission

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Legal Issues in the

Deal
Nokia Indias tax
issues

Nokias
Patents

Complaints
filed by
Korean
mobile
phone
manufacture
rs over
potential
patent
abuse

Patent
portfolio
retained by
Nokia with 10
years nonexclusive
license to
Microsoft

Freeze on all
assets of
Nokia India
due to
withholding of
tax payment
Nokias
decision
Excluded
Chennai
factory from
deal &
Microsoft used
it as contract
manufacturer
for low-cost
Asha series

Total taxes payable

by Nokia Income Tax
Department Rs
2,649 crores (tax
on royalty
payments to
parent)
Tamil Nadu tax
authorities Rs
2,400 crores
(sales tax for
devices sold in
Chennai)

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 Nokia confirms that the Chennai factory will be excluded from the Microsoft deal,
due to the asset freeze imposed by the Income Tax Department

Nokia India receives a Rs 2,400 crore (300m) sales tax bill from tax authorities in
Tamil Nadu, who claim that handsets manufactured in Chennai during FY 09/1011/12 were not exported but were sold in Tamil Nadu
Nokia India offers that if the asset freeze is lifted, so that the sale to Microsoft can
proceed, it will transfer all proceeds to an escrow account containing a minimum of
Rs 2,250 crore, as security for the tax claim

Nokia announces intention to sell its Devices & Services division to Microsoft. IT
Department freezes all assets of Nokia India.

Income Tax Department issues fine onNokiaIndia, alleging it has failed to withhold
taxes on royalty payments made to its parent since 2006

April
2014

February
2014

Decembe
r 2013

Septemb
er 2013

March
2013

Resulting Entity Performance Post

Deal
Microsoftstock dropped by more than 5% in early trading following the
acquisition announcement in September, 2013
Microsoft reported that it sold 9.3 million Lumia phones in the quarter, up 5.6
percent from the record 8.3 million devices sold previous year
Microsoft's earnings took a hit because of Microsoft's acquisition of Nokia's
handset business
Phone Hardware did not meet its sales volume and revenue goals, and the mix of
units sold had lower margins than planned
Nokia hoped that Windows Phone would make it stand out in a sea of Android and
iOS devices and it did, but not in the fashion it had wanted
Microsoft wrote $7.6b as impairment charge for smart phone business and
patents purchased
This write-off was Microsoft's largest ever
Exceeding by 23% the $6.2 billion charge it took in 2012 to account for the failure
of its 2007 purchase of online marketing and advertising company aQuantive

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Issues During Or After

The Deal
Samsung-Microsoft brawl post deal
Samsung filed a suit claiming that because of the Nokia acquisition,
Microsoft violated its 2011 deal with Samsung
According to the deal, Samsung had to pay Microsoft royalties in exchange
for a patent license on its Android smartphones. Because Samsung was
also making Windows Phone devices and shares confidential business
information with Microsoft, the Redmont company agreed to reduce the
royalty payments
Samsung stated that it refuses to fulfill its end of the deal as it now sees
the software giant as a direct competitor

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Issues During Or After

The Deal
Broken Promises to Finland post deal
Microsoftpromised about creating a data center in Finland
Nokia had around 40 per cent of the world's mobile phone industry in 2008
before it was eclipsed by touch-screen smartphones made by Apple and
Samsung
As a result, Nokia and Microsoft slashed thousands of Finnish jobs over the
past decade
The decline of Nokia's former phone business and the lack of substitute
jobs is the main reason for Finland's current economicstagnation
Finland government said it would have "serious talks"with Microsoft over
how the company could help those laid off to find new jobs

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Issues During Or After

The Deal
Microsoft writes off billions from Nokia deal
Microsoft was forced to eat a $7.6 billion write-down related to the deal in
2015
In the second half of fiscal year 2015, phone hardware did not meet its
sales volume and revenue goals, and the mix of units sold had lower
margins than planned
Microsoft recorded a goodwill impairment charge of $5.1 billion, reducing
Phone Hardwares goodwill from $5.4 billion to $116 million, net of foreign
currency remeasurements, as well as an impairment charge of $2.2 billion
related to the write-down of Phone Hardware intangible assets.

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Recent News
Microsoft announced it would lay off about 7,800 employees, most of
them working in its device division
Microsoft writes off billions of dollars related to its Nokia acquisition
Microsoft announced an agreement to sell the companys entry-level
feature phone assets to FIH Mobile Ltd., a subsidiary of Hon Hai/Foxconn
Technology Group, and HMD Global, Oy for $350 million
Poor Economic conditions of Finland post deal

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