Finnish manufacturer Nokia, which once dominated the global mobile devices market, will exit the handset business by early 2014. Earlier this month, it agreed to sell its devices and services business to US-based Microsoft for Euro 5.44 billion in cash.

Announcing the deal, Microsoft stated that it will be acquiring all of Nokia?s devices and services business. This includes its mobile phone and smart devices portfolio and device and service production facilities; sales and marketing activities; and support functions. Microsoft will receive a 10-year non-exclusive licence to Nokia?s patents, including the Nokia brand, with an option to extend that licence. About 32,000 Nokia employees will shift to Microsoft, including 4,700 personnel based in Finland.

The sale price for Nokia broadly comprises Euro 3.79 billion for the devices and services business, and Euro 1.65 billion for the patents licence.

The deal is expected to close in the first quarter of 2014. The process has been initiated with a reshuffle of the management team. Nokia?s current chairman Risto Siilasmaa has become the interim chief executive officer (CEO) while CEO Stephen Elop has been appointed executive vice-president for the devices and services business.

In an email to Microsoft employees, Steve Ballmer, CEO, Microsoft, stated, ?We are very excited about the proposal to bring the best mobile device efforts of Microsoft and Nokia together. Our Windows Phone partnership over the past two and a half years has yielded  incredible work ? the stunning Lumia 1020 is a great example. Now is the time to build on this momentum and accelerate our share and profits in phones. Clearly, greater success with phones will strengthen the overall opportunity for us and our partners.?

Winning proposition

According to analysts, the industry has been expecting such an alliance since Nokia selected Microsoft?s Windows phone software to take on stiff competition from rivals like Apple, Inc. and Samsung Electronics. This makes business sense as well. Microsoft and Nokia have both been facing challenges over the past few years.

Microsoft?s Windows ranks third among operating system (OS) platforms after Apple?s iOS and Google?s Android. So far, Microsoft has failed to set up a profitable mobile device business and even its own mobile gadget, the Surface tablet, has not generated significant response. Moreover, even though Microsoft?s and Nokia?s products have been appreciated for their quality, handset sales have not gained momentum. However, Microsoft has vast financial resources to develop a strong strategy. The Windows OS, the Office suite of business software and the Xbox game console contribute significantly to the company?s revenues.

Microsoft?s acquisition of Nokia?s handset business should work well for the former. According to Benoy C.S., director, information and communication technology practice, Frost & Sullivan, the mobile ecosystem is evolving very fast and Microsoft has placed big bets on its Windows 8 OS. The response from other mobile device companies for Windows 8-based mobile phones was not very encouraging. Hence, it will be critical for Microsoft to have a strong foothold in the devices market to promote this platform. With a couple of new and good product launches similar to Lumia?s, Microsoft should be able to create the much-needed momentum in the Windows mobile ecosystem. Moreover, in countries like India, we have just started witnessing a transition from feature phones to smartphones. The acquisition will provide Microsoft access to the high-volume entry-level handset market in India.

For several years, Nokia has been losing share in the handset market ? from 40 per cent in 2007 to 15 per cent currently. And while it is the world?s second largest handset manufacturer, it is way behind market leader Samsung. Nokia, moreover, is not among the top five players in the more lucrative and fast growing smartphone market, despite the growing sales of its Lumia series. The combined market share of Google?s Android and Apple?s iOS is 90 per cent.

Not surprisingly, the acquisition, which will end Nokia?s 148-year presence in the telecom devices market, has sent ripples of concern amongst Finnish investors and analysts. At one point, the company accounted for 16 per cent of the country?s exports.

Alexander Stubb, Finland?s minister for European affairs and foreign trade, tweeted: ?For a lot of us Finns, including myself, Nokia phones are a part of what we grew up with. Many first reactions to the deal will be emotional.?

Elop stated at a press conference, ?It is very clear to me that rationally this is the right step going forward. However, I feel sadness because inevitably we are changing Nokia and what it stands for.?

Still, as industry experts note, this was perhaps the last opportunity for Nokia to sell its handset business. It has had a bad run for some time and could not have managed on its own for long. The acquisition is beneficial for both the companies. ?The Android and iOS operating systems have a higher level of popularity than Windows. I would expect that the coming together of the two giants would provide a fillip to their ability to compete in this competitive segment and enhance the company?s market share,? says Dr Mahesh Uppal, director, ComFirst.

Industry analysts believe that this is a strategic move by Microsoft and it is in line with the company?s overall vision. In order to promote its Windows OS platform for mobile phones, it will be important for Microsoft to have a strong mobile devices business.

What Nokia retains

After offloading its devices and services business, Nokia will have an employee strength of 56,000 (based on its April-June 2013 report), its patent portfolio, technology development operations, and three lines of business that generated revenues of Euro 15.3 billion in 2012. Its infrastructure arm, Nokia Solutions and Networks (formerly Nokia Siemens Networks), which recently bought out Siemens? stake in the company, will continue to operate.

Impact on India operations

Apart from smartphones, Nokia offers basic phones, and is a leading player in this segment in emerging markets like India. While Microsoft plans to tap the sub-Rs 10,000 device segment for volumes, analysts say that this will be a challenge for the company. Microsoft cannot ignore the basic phone market as it is large in size, but experts feel that the company lacks Nokia?s retail and supply chain experience in markets like India.

?The devices business, especially the non-smartphone segment in emerging markets, has very different dynamics. Here the vendor needs to manage tight supply and distribution chains, and build brands through word of mouth. Microsoft does not have the experience to run operations of this scale,? says an analyst from Kotak Mahindra.

Nokia has been operating in India since the mid-1990s. According to Thomson Reuters, India accounted for 7 per cent of Nokia?s revenues in 2012 while the US accounted for 6 per cent. Also, the company has a strong presence through 200,000 outlets in India, and its Chennai handset facility is one of its biggest manufacturing plants globally.

The acquisition has led to job security-related concerns among workers at the Chennai plant. The issue was addressed by Ballmer through an email, stating: ?There are no significant plans to shift where work is done in the world as we integrate. So, we expect the Nokia teams to stay largely in place, geographically.? The Chennai facility supports the livelihood of over 15,000 people.

As Uppal puts it, ?We can expect more aggressive marketing in India, particularly in the smartphone segment. While I do not expect a major short-term impact, Microsoft will face intense competition and will have to make a significant effort to catch up with other players.?