Microsoft is officially launching itself into the smartphone hardware business. The US software company has made a €5,4bn cash offer to buy Nokia’s device and services business, to license the company’s patents and to use Nokia’s mapping services.

As part of the transaction, Nokia CEO Stephen Elop will join Microsoft, which has offered to pay €3,8bn for the Devices & Services business and an additional €1,6bn to license patents from the Finnish company.

The deal is expected to close in the first quarter of 2014, subject to various approvals and other conditions, Microsoft says in a statement.

“Building on the partnership with Nokia announced in February 2011 and the increasing success of Nokia’s Lumia smartphones, Microsoft aims to accelerate the growth of its share and profit in mobile devices through faster innovation, increased synergies, and unified branding and marketing,” the statement reads.

“For Nokia, this transaction is expected to be significantly accretive to earnings, strengthen its financial position, and provide a solid basis for future investment in its continuing businesses.”

News of the proposed deal comes just days after Microsoft announced that its CEO, Steve Ballmer, would step down within the next 12 months. Analysts have speculated that Elop could be a strong contender to replace Ballmer, who has been at the helm of Microsoft for the past 13 years.

Microsoft has struggled to make headway in the smartphone market, slipping to a distant third place behind Google, which develops the Android operating system used by companies such as Samsung, Sony, Huawei and HTC, and Apple, which makes the iPhone. Nokia is Microsoft’s biggest partner for its Windows Phone platform.

Nokia chairman Risto Siilasmaa has been appointed as Nokia interim CEO following the announcement. He says Nokia has conducted a thorough assessment of how to maximise shareholder value, including consideration of a variety of alternatives. “We believe this transaction is the best path forward for Nokia and its shareholders. Additionally, the deal offers future opportunities for many Nokia employees as part of a company with the strategy, financial resources and determination to succeed in the mobile space,” Siilasmaa says.

The deal will add 32 000 Nokia employees to Microsoft’s workforce. The operations that will be transferred to Microsoft generated €14,9bn, or almost 50% of Nokia’s net sales in 2012.

Included in the deal is Nokia’s Lumia and Asha series of phones and it will license the Nokia brand for use with current Nokia mobile phone products. However, Nokia will continue to own the Nokia brand.

Nokia will retain its patent portfolio and will grant Microsoft a 10-year licence to its patents and an option to extend this in perpetuity.

Microsoft will immediately make available to Nokia €1,5bn of financing in the form of three €500m tranches of convertible notes. If Nokia decides to draw down on this financing option, it will pay back these notes to Microsoft from the proceeds of the deal. — (c) 2013 NewsCentral Media