Microsoft’s Nokia buyout: drilling down into the numbers

Microsoft has bought Nokia’s devices division for €5.44bn – less than half of what it cost Google to buy Motorola’s phone business.

Microsoft's Nokia buyout: drilling down into the numbers

Compared to previous tech buyouts, the €5.44bn price tag on Nokia isn’t a heavy investment – especially when you consider Microsoft paid more than that for Skype, or even compared to the software giant’s annual revenue.

Of course, it’s difficult to compare such firms. Instagram was valued at $500 million weeks before its purchase for twice as much, and the firm had only 13 employees.

Microsoft’s $8.8bn purchase of Skype in 2011 was widely criticised as being too expensive – the VoIP firm was partially sold off by eBay in 2009, valuing it at $2.75bn.

The price in both cases, however, was thought to have been driven up by rival bidders – not a problem with Nokia.

Versus Motorola

A better comparison might be Google’s $12.5bn acquisition of Motorola in 2011.

The quarter before Google acquired Motorola, the mobile maker posted a loss of $56m on revenue of $3.3bn. Last quarter, Nokia’s Devices & Services division posted incredibly similar figures: a loss of €33m on revenue of €2.274bn ($3bn).

Before the Google acquisition, Motorola sold 4.4m smartphones; in its latest quarter, Nokia sold 7.4m Lumia smartphones.

However, at the time of the acquisition, Google noted the Motorola deal had much to do with the company’s patents. While Asymco analyst Horace Dediu said over Twitter that “Nokia’s IP is way more valuable than what [Motorola] had,” Microsoft isn’t actually buying Nokia’s patents, it’s merely licensing them.

Nokia deal

Microsoft and Nokia were already linked via their 2011 exclusivity deal.

As All Things Digital reports, Microsoft currently makes $10 per Nokia smartphone from Windows Phone licencing fees, while smart devices margins are $40, suggesting Microsoft stands to benefit from the purchase.

However, before the acquisition and as part of its deal, Microsoft paid Nokia $250 million a quarter to help prop it up – but has so far received less than that back in OS licensing.

“Over the life of the agreement the total amount of the platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments,” Nokia said in its last results.

Up until the end of 2012, Microsoft had been paying more than it received, and that was expected to continue this year, with “platform support payments is expected to slightly exceed the total amount of the minimum software royalty commitment payments”, according to a filing.

Across the life of the agreement, the software royalties were expected to exceed the platform support payments by €500m.

What this means is that Microsoft bought Nokia before the payment balance has tipped in its favour, before the cash started flowing back to the OS maker.

What it means for Microsoft

Microsoft recently reorganised its divisions, but last quarter its entertainment and devices business made $1.9bn in revenue and posted a $110m loss. Adding Nokia’s devices and services division will more than double that, after posting $3bn in revenue last quarter.

However, both divisions posted losses – Microsoft’s devices lost $110m while Nokia lost $43m.

Still, compared to Microsoft’s overall business, it’s a small slice of the company’s total revenue of $19.8bn, and $6bn in profit, for the last quarter.

What it means for Nokia

Microsoft has bought about half of Nokia in terms of revenue, the companies said: “The operations that are planned to be transferred to Microsoft generated an estimated €14.9 billion, or almost 50%, of Nokia’s net sales for the full year 2012.”

The remaining businesses are its Here Maps and Nokia Siemens Networks. Microsoft is separately licensing the mapping service for four years, while Nokia bought Siemens’ 50% share of NSN last month. The networking arm is the one part of the company to actually post a profit last quarter, of €8m.

In terms of staff, 32,000 will transfer to Microsoft, with 56,000 staying with Nokia.

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