Another Blistering Merger Fail, but Wall Street wins again.
Microsoft entered the final-final or pre-final-final episode of its Nokia saga. Its press release on Wednesday explained that it would “streamline” its smartphone hardware business. It would throw in the towel on smartphones for consumers and try to carve out a niche in corporate smartphones. It would be accompanied by more bloodletting.
With its usual big-money genius, Microsoft had acquired Nokia’s mobile-phone business and patents In September 2013. Nokia’s credit rating was junk. Its market share had collapsed. It had lost over $4 billion the prior year. But its smartphones were using the Windows Phones operating system.
The original terms of the deal called for a purchase price of $5.4 billion. This soon ballooned to a new purchase price of $7.2 billion. To make the deal go down better, Microsoft promised $600 million in annual cost savings within 18 months.
In an April 2015 SEC filing, Microsoft disclosed that the total purchase price ended up being $7.9 billion. Three months later, in its annual report for the year ended June 30, 2015, it disclosed that, after all the beans had been counted, the “total purchase price” of Nokia had ballooned to $9.4 billion.
In July, 2014, six months after Satya Nadella had been anointed CEO, the annual cost savings came into focus: 18,000 people would be axed, at a cost of $1.6 billion. Shares jumped to a 14-year high.
A year later, in July 2015, Nadella explained to his worried underlings that Microsoft would ax another 7,800 people, “primarily in our phone business,” as part of a “fundamental restructuring.” And it would write down its Nokia assets by an additional $7.6 billion, on top of a restructuring charge of $750 million to $850 million.
At that point, the $9.4 billion “total purchase price” had led to $10 billion in write-offs, decorated with the destruction of 25,800 jobs.
So how smart was that smartphone strategy?
Gartner reported last week that Windows software had a nearly invisible 0.7% share of the smartphone market, down from 2.5% a year ago. People don’t even know that there are still smartphones running Windows.
At the time, Microsoft said that the bloodletting would be wrapped up by the end of its fiscal year, June 30, 2016. But Microsoft wasn’t through yet. So more bloodletting.
On Wednesday, it announced that it would ax another 1,850 jobs. Of them, 1,350 would be in Finland where Nokia had once been the corporate star. And there’d be another “impairment and restructuring charge” of $950 million, including $200 million in severance payments.
“We are focusing our phone efforts where we have differentiation – with enterprises that value security, manageability and our Continuum capability, and consumers who value the same,” Nadella explained in the press release.
The completion date has once again been move out. Instead of having everything squared away by June 30, 2016, it would be finally “fully completed by July 2017.”
The post-final preliminary sub-total….
So far, that misbegotten acquisition with a “total purchase price” of $9.4 billion has led to about $11 billion in write-offs and the destruction of 27,650 jobs.
On the positive side, Microsoft was able to unload its low-end mobile phone business to HMD Global Oy and FIH Mobile Ltd., a subsidiary of Hon Hai/Foxconn Technology Group, for $350 million. At least it got something.
Executive VP of the Windows and Devices Group, Terry Myerson, told the remaining employees in an email that the company wasn’t actually throwing the towel in on the mobile phone business. They’d continue to “develop great new devices,” he wrote, and added in parenthesis, “(we’re scaling back, but we’re not out!).”
Microsoft has been through this before.
Microsoft should have known because it’s a repeat offender. Its biggest acquisition fail until then: in 2012, the year before it plowed into the Nokia idiocy, it wrote off $6.2 billion for the fiasco acquisition in 2007 of online marketing and advertising company aQuantive. That was nearly the entire purchase price.
That’s how these mega Mergers & Acquisitions work.
They’re designed by Wall Street to extract fees at every step along the way, and by Corporate America to show some kind of growth where there’s none and to enrich executives and aggrandize their power. Creating oligopolies that can stifle innovation is also a laudable goal.
Throughout, Wall Street analysts and corporate chieftains tell investors one line of bull after another to manipulate up shares and bonds or at least to bamboozle investors into not dumping them.
Rarely does anything good come of these mega M&A deals. They don’t move the economy or even the company forward. They don’t boost innovation or productivity. Instead, they distract the company, destroy jobs, blow up capital, entail shut-downs, stifle innovation, and trigger economic decline.
References to 2009 & the Global Financial Crisis keep popping up in the reports about manufacturing not only in the US about around the world, because that’s how bad it has gotten. Read… Manufacturing Recession Goes Global as Demand Withers
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Still more evidence that smartphones have become a mere utility. Enjoyed your interview on FSN Wolf. Keep up the great work!
Smartphones may be a utility (what ever that means), but Microsoft had nothing to do with it. Microsoft’s arrogance simply caused/allowed them to flush away $11B in capital (not including 3 year’s opportunity cost…).
That’s a lot of money and that’s an unbelievable amount of corporate stupidity. It’s also a strong case for why “mature” tech companies should pay dividends as opposed to chasing the holy grail (Apple – are you listening…didn’t think so).
Profits belong to shareholders, not corporate managers. This has always been a difficult concept for corporate managers; the dot-com era simply made a bad situation worse.
Another quality article!
Microsoft got a lot a IP from this deal which is important for their business going forward. Secondly, the write offs include assets that were part of Microsoft’s business before they bought Nokia. I think you assessment is a bit incomplete. Smartphones went from double digit growth to mid single digit at lightening speed. If this was predictable, then most managers would not have lost so much money on Apple’s decline! It is not game over yet.
Sales of Windows-based smartphones have totally collapsed (that’s different than “single digit” growth, or even the decline the iPhone is experiencing). Windows-based smartphones are no longer relevant. That’s a sad statement.
It’s a game over, and has long been. Windows phone never gained significant power user base, and thus “the ecosystem” couldn’t grow. If customers use Lumias like dump phones, there’s no sense to create applications and services for them.
Perhaps they should target drug dealers and men with mistresses launching a new line of cheap phones called The Burner. :)
It is sad. I had a Windows phone and I loved it. Unfortunately, none of the APP developers took it serious.
It was a big mistake going after the budget phone sector. They should have had another line of high end phones that appealed to people like me.
I sure wish someone would call me to get my opinion sometimes…..
If they had paid developers well they would have had millions of apps.
Microsoft certainly did get IP in the Nokia deal; the issue was could Microsoft managers use it to deliver shareholder value.
Given they’ve written off the whole purchase (eg associated IP “good will”), the answer is “NO!”. Maybe a smarter management team could have, but not Microsoft.
Vastly overpaying (with shareholder money) for IP in a massively failing business whose business has collapsed and the market is ignoring is generally not, as we say, “accretive to earnings.
All this (including Apple slow-down) was certainly reasonably predictable. With a certain class of stocks, the market has fallen in love with the “greater fool”approach to investing; i.e.: “I’m going to invest in this stupid thing because the stock will skyrocket, and I can sell it to a greater fool before the whole thing blows up”.
I’m looking forward to Microsoft’s demise. Wall St has really drank its own kool aid and now it will become impossible to deny what they did to Main Street. People simply aren’t spending. This correction will be a good thing.
Reality is a spiritual experience!
Hmm. By any chance do you work at microsoft? Someone in your family?
It’s what happens when you have too much money and don’t know what to do with it. Add a (large) bit of hubris, buy a loser with the belief you can turn it into a winner only because you have some association with it, and the fate of the deal is sealed.
The 27,000 workers got an extension of their employment for a few years anyway, but Nokia Mobile probably should have been sold for $1, or maybe MS could have picked up the pieces for a token amount after a bankruptcy if they really wanted it.
a year and a half of unemployment at the most-remember the economy is JUMPING-and those assholes at MS are likely to challenge attempts to collect unemployment-I know.
A friend worked at Cisco back in 2004 doing business integration of newly acquired companies….said most were screwed up.
Breathtaking mismanagement and loss of shareholder value for which the people involved in the debacle were so well paid. Clearly the management team is not up to the task.
They should have handed the purchase over to a 10 yo boy. He probably would have got them a much better deal.
If you do not have a windows 10 computers yet beware of MS updates of previous operating systems (MS 8/7/vista etc) that can turn your machine into a paper weight to encourage you to buy a new one. The fix is to open into safe mode and then run system restore, selecting a previous restore date where all was working well . Then your computer will be fine. Then set the windows update system so that it cannot automatically install software updates on your machine and screw up the software again.
Better yet, use this utility to ensure that the forced Windows 10 update is never performed on your older but still perfectly usable Vista/7/8 machine.
You can turn OFF windows update in 10, as a service.
For anybody who has issue with large updates at bad time’sthat are unstoppable.
Ive been reading comments that MS commandeers your PC now-when you get a popup asking to update-Yes/no/close are all coded to UPDATE-at gunpoint
Then stop crying about it, and do something about it.
Turn updates off as a service it’s SO SIMPLE .
Then you update, as and when you chose, as it should be.
As a Minnesotan, I can say that Nokia makes something that is the best – snow tires, eh? Although now they’re branded Nokian Hakkapeliitta R2.
My eight year old iMac with a memory upgrade runs the Microsoft Office system better than a PC. Microsoft is a dinosaur in many respects, but it still has a market Cap of $406 billion, and it operates at nearly 40 to 1 P/E.
Google and Android vs Apple is competitive, but as Wolf states, Windows-based smartphones are no longer relevant. I am not sure why that’s a sad statement unless the Windows-based phones work(ed) well.
I’ve often wondered how much more productive the tech world would have been if Microsoft had never existed and we all used an OS that actually worked like it was supposed to. I used to teach computers at a college and though I had to teach Windows, refused to use it at home and encouraged everyone to switch to Mac or Linux. Windows is a total joke.
The Windows-IBM collaboration allowed open architecture open source systems at great savings, and the benefit of research and competition by the many rather than the one. Backward compatibility (up to a reasonable limit) has always been a feature of PCs, but Apple’s planned obsolescence results in even more cost for the consumer.
The Apple cult accounts for only single-digit market numbers at multiples of cost to the consumer. Apple’s negative marketing strategy consisted of ridiculing and disparaging Microsoft, PCs in general, and Intel, with such ads as ‘1984’ with zombies lining up (exactly the opposite of the truth because PC users had many options to choose from, whereas Apple had only one), and the Intel processor on a turtle. However, the zombies line up at Apple stores and the Intel processor is a much-promoted ‘feature’ for Apple computers, the aged Motorola processors having been retired many years ago. The fact that Apple runs Windows is now a feature, too.
Notice also that Microsoft has never engaged in negative advertising.
The only reason Gates ponied up 150 million dollars to save them when Apple was in complete collapse was to hopefully prevent losing his only competitor.
What, another possible microsoft employee? ;-)
Look, I’ve been (sadly) using microsoft/pcs from the get go and have bitterly complained about them FOREVA. Besides habitually hampering its customers with freakin’ buggy, crash prone software, (ctrl-alt-del) Microsoft has done two things to absolutely stifle innovation that effects much more than their crappy OS.
1. they helped push the idiotic convention that software is copyrighted. What a disaster. Software should be considered the same as math and therefore there should be no gov’t monopoly on it. It is certainly in no way like a novel or song. Copyright? Horrendous.
2. they helped pervert contract law. The idea that a corporation can unilaterally change a contract, not only without the other party agreeing, but without the other party even knowing, is thoroughly disgusting.
And don’t get me started on that creepy Bill Gates trying to cripple and sterilize whole populations of third world countries, as well as destroy the intellectual development of US children. Ugh.
I agree with Faithful Reader–the demise of microsoft would be especially delicious and can’t happen soon enough.
But their Windows based phones were/are junk.
I have a MS windows fone – I previously had a samsung
Tell me something the samsung fone can do that the MS fone cannot.
I’ll be waiting an eternity
Copyright is one of the basic protections for people and companies engaged in creative development (and entertainment) that often takes years to bring to fruition, and at great cost.
I don’t mind paying for people’s work.
No, I don’t work for Microsoft.
You’re living in the past-your opinions are irrelevant
MS is losing market share as an antiquated OS and all its other enterprises are dead or dying-Theyve even had to knock $100 off their Xbox since sales are lagging-The ONLY thing going right for them is MS OFFICE
Kid, you got that right. If only people would smarten up and dump the Windowz O/S, and get into Linux or Android, or anything else. I use SELinux at a local library and it’s flawless, very secure. It’s unbelievable, that in this day and age, one-quarter into the 21st century, how stupid Windowz is, and that people still use it.
This economic fiasco of buying Nokia is not surprising; it’s too bad the stock price doesn’t go to near zero where it belongs.
Dinosaur that I am, I recall that it was Microsoft that cracked open IBM. They did it by reverse engineering IBM OS. To prevent lawsuits, the ones that did the reverse-engineering had to aver that they had never worked for IBM.
Ever see or read what became that.
Has an interesting factual base.
Nokian tyres is another company, Nokia doesn’t make tyres :) But yes, R2 is decent winter tyre.
Nokia used to be a conglomerate that made everything from paper to tires to electronics. When it was broken up the electronics operation kept the Nokia name and the other parts became ‘Nokian’.
Siilasmaa was smart. He managed to sell Nokia’s bleeding mobile operation to MS for a nice amount of cash, thus aquiring the means to repair Nokia’s balance sheet and in addition they managed to buy out Siemens from NSN for an surprisingly modest sun and becaise of this Nokia is still a powerhouse in telephony networking. Let’s see now what the merger with Alcatel will bring with it in the future
Btw, one big reason MS screwed up the windows phone was the promised but as it turned out lack of upgrading wp7 devices to wp8, the delay in releasing wp8.1 and nonexistent marketing using AT&T as preferred dealer. It seems that MS’ new boss after B didn’t care at all about developing and sustaining the mobile systems …
I spent a short time at MS in the nineties. I found it to be development focused rather than customer focused: they expected the customers to come to them rather than other way around. That could partly be explained by the geek culture, and the fact that they employed mostly young people who have little loyalty to anything really. (Probably the same malaise afflicts Google and Apple today, to mention just a few).
What bothered me that they have little loyalty to their third party developers: developed and published an API, and then abandoned it completely for something else.
Now, the business side. They became a cash machine partly because they refused to pay dividends. This led to a bloated bank account and the need to spend it, and they spent it recklessly. It did not matter then and no shareholder challenged that.
Not sure if anything has changed, but the fact that they did something they never did previously: mass layoffs.
They did start paying dividends in 2003, and the shares have been split 288 for 1, a nice little bonus for those long-term holders. 10 cents turned into 59 dollars plus dividends, and the shares are near the all-time high.
Geeks and engineers of all types have always looked down on the unwashed masses but there is benefit: all you have to do is push a button to make things work instead of needing to know how it all happens. The high-tech for the afficianado becomes an appliance. The downside: once in a very long while you push the button, something doesn’t work, and the geeks and engineers get cursed.
Wolf, it’s refreshing to see my own cynical attitude shared by your insightful articles. I quote: “Creating oligopolies that can stifle innovation is also a laudable goal.”
***-opolies do exactly that, which is proven beyond all doubt by academia. It’s a force powerful enough to bring down empires.
That’s why it’s too bad there are no political candidates in my district who truly understand the concepts of free markets and trade. Just because capitalism naturally trends toward monopolies and wealth equality doesn’t mean it’s just, or even pro-business. Perhaps I should become active in politics myself. But positions like mine make anyone a Pariah ..
Rule of nature: everything agglomerates until it disperses.
I heard politics pays well, especially in Congress. So that might not be a bad idea. You can always change your positions as needed. Happens all the time, on a dime.
Having blown 19 billion on phones what other wacky adventure beckons- how about driverless cars. A mere 500 million should force Google to share headlines. And the two outfits have something in common- neither knows anything about the car biz.
Or robots!- the mere word stimulates the sci-fi gene in people and it might goose the share price.
Just a reminder that the first business to actually turn a profit from the internet was porn. You… or maybe I should say ‘one’ can spend about $8000 on a life size doll right now ( Real Doll Inc,) so when you think humanoid robot…
But it won’t make your breakfast.
Windows phone-in sale charts it was alway lumped in with “Others”
Windows 10-(lol-they are almost forcing you at gunpoint to upgrade)
the ZUNE and soon,
the SURFACE ..
The problem with the Windows phone, besides the fact that Windows 10 sucks, is that Microsoft has a terrible reputation on the hardware side. If you had owned 7 xboxes you would understand. There is an entire generation of young people, gamers, who don’t trust Microsoft as a hardware provider.
The problem with anything Micro$oft is simple.
You are dealing with an entity whose core “Business Tenant” and “customer relation’s position” is, and always has been.
“Make THEM, need us”
Any Entity that has that attitude to its Customer’s, is an entity to avoid. Simple.
Simple marketing error, stubbornness, ignorance. They decided to force cloud based storage after OS 7, including MS office which was the selling point from earlier Microsoft phones. There were many angry and disappointed people at that time. They also removed sync with the Computer. Many who thought they upgraded found out very quickly that all they could do was to have everything only cloud based. Some went back to older models which did the killing of the vibe.
Apple synced flawlessly so became obvious choice for anyone needing to upgrade their phone at that time. That is why Android with cloud based storage only stalled the same way. Android later allowed apps to do the computer syncing but Win8 didn’t.
Who knows, maybe it was meant to be at loss a write off deal, that is why they refused to listen to business oriented customers desperate requests to allow to sync PCs…
I guess stalker ad revenues exceed phone bill revenues http://www.telegraph.co.uk/technology/2016/05/29/technology-giants-facebook-and-microsoft-to-lay-4000-mile-transa/
Another in a long line of failures by Steve Ball-Bearing, one of the worst business executives of the millenium.
I wouldn’t wish his business acumen on my worst enemy.
Gates wasn’t your dorm mate at Harvard was he? If so, you too, could have acquired rotten business judgment.
I found it amazing that Steve Ballmer retained his CEO job for so long, despite his obvious incompetence. His arrogance, bluster and sophomoric antics couldn’t conceal the fact that he was largely responsible for Microsoft completely squandering its brand recognition, deep pocket resources and great positioning with respect to the smartphone market. His dismissive attitude towards the initial release of the iPhone perfectly summed up his complete lack of strategic vision and his absence of respect for his competitors.
Ballmer should have been fired for his failed leadership.