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Synergy of the Microsoft

Nokia Merger –
We have all read about the real motive behind mergers – to create a potential
synergy between the different parties.
The famed equation being,
A+B becomes C-D+E+F, with A and B as the merging entities,
C= combined worth of the 2 entities,
D= synergy costs,
E= Synergy Benefits and
F= Institutional benefits.

Microsoft wanted to create synergy through their merger, despite the


incredible high merger costs - the company has laid off over 15,000 employees,
the majority of whom came in from the Nokia acquisition. In all, more than
20,000 jobs at Microsoft was cut once the restructuring was complete. The
cuts come on top of a round of 12,500 redundancies that affected former
Nokia employees. Microsoft also took a $7.6bn write-down on the acquisition
of the Nokia devices and services business, plus a $750m to $850m
restructuring charge. All this definitely forces one to reconsider what was the
logic behind the acquisition, and where were the synergy benefits.

Microsoft has always struggled in the mobile space despite being a first mover
in the space with Windows CE and Windows Mobile (far earlier than Apple and
Google); but it was late to adopt the mobile developer ecosystem and "app
store" strategies of its competitors.
In November 2010, following the surprising success of the iPhone, the
company introduced Windows Phone. However, Microsoft needed OEM
hardware partners, who were reluctant to take on the risk of an unproven
software platform when they were already enjoying success with Android.
Nokia was the sole Braveheart who ventured on to build phones on this new
unproven operating system. Nokia made some impressive Windows Phones
during its partnership with Microsoft, but it was not able to bring itself back to
profitability. By 2013, in fact, the company was considering a move to Android
and had even built prototype devices running Google's software. If that move
had succeeded, Windows Phone would have been left with no OEM support. It
would have effectively been a death sentence.
Ballmer, the then CEO of Microsoft, looking to solidify his legacy, saw a
potential synergy. Nokia, with its native manufacturing capability and R&D,
could be Microsoft's solution to ramping up their mobile presence, in addition
to providing an essential distribution channel via previously existing carrier
relationships.

Thus, to that end, Microsoft bought Nokia's mobile business for over $7 billion.
This included the acquisition of most of the company's assets in Finland as well
as manufacturing capacity in Asia, along with 24,000 employees. Many
analysts questioned why Microsoft had not simply contract manufactured the
phones, negotiated the carrier relationships on its own, and hired engineering
talent for much less money.

Sadly, the analysts proved to have been very right. Not only did Microsoft fail
to create enough synergy, but also failed to even leverage any of the Nokia’s
excellent credentials and manufacturing prowess to create value. What
happened in the end is that, the merger was an HR nightmare with extensive
layoffs, and redundancies being created. Also, Microsoft took heavy financial
losses with a write-down of almost 7 billion dollars on the merged entity, after
the acquisition. The key point was that, the tie-up between Microsoft and
Nokia was based on weakness, not strength. Microsoft had been trying to
persuade manufacturers to use its Windows Phone operating system on their
phones, but with little success. Similarly, Nokia had found the competition
from Android and iOS too strong. The combined entity did not reap any
synergy benefits, and instead rather pooled their problems together.

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