Analyzing the Failure of Microsoft's Acquisition of Nokia

In 2014, Microsoft acquired Nokia with the aim of expanding into the growing smartphone market. However, this merger turned out to be a failure, resulting in substantial financial write-offs and negative repercussions for both companies. The acquisition led to massive layoffs at Nokia, increasing unemployment rates in regions heavily reliant on Nokia's operations. Additionally, there was a noticeable decrease in GDP contribution from these areas. Financially, Microsoft faced significant losses as the venture failed to generate expected revenues. Consequently, Microsoft exited the smartphone manufacturing business, and Nokia sold its mobile division. Despite this setback, both companies are making new efforts to re-enter the market with fresh strategies. This analysis provides insights into the managerial economics involved in such high-stakes corporate acquisitions, highlighting the critical importance of strategic alignment and execution.

Running head: MANAGERIAL ECONOMICS
Managerial economics
Name of the Student
Name of the University
Author note

1
MANAGERIAL ECONOMICS
Table of Contents
Introduction................................................................................................................................1
Discussion..................................................................................................................................1
Conclusion..................................................................................................................................6
References..................................................................................................................................7

2
MANAGERIAL ECONOMICS
Introduction
Nokia and Microsoft are well-known names when it comes to mobile phone business
and information technology industry. This is due to their performance in the past years and
the famous merger and acquisition that both the company took in 2014. Nokia is a well-
known information technology company that started operating its business in 1985, was
eventually merge by Microsoft in 2011, and bought by Microsoft in 2014 (Ali-Yrkkö, et al.,
2013). Microsoft is known as a named American multinational company selling upgraded
technology in today’s world. The company started introducing its new Windows OS in 2010
and new strategy with new type of Smartphone. This made the company to join Nokia, the
Smartphone manufacturing company. However, later in 2013 Microsoft announced to acquire
Nokia’s devices. Acquisition and merger has both long-term effect and short-term affect on
the economy and on the industry (Ali-Yrkkö, et al., 2013). The essay will analyze the
performance of the consolidated companies after the deal took place. The analysis has been
done based on managerial economy using various economic affect of the merger and
acquisition that took place.
Discussion
Nokia has always been known as the pioneer of telecommunication and information
technology sector. The dominance of Nokia in the mobile industry continued for a long time
when the company was known for its Smartphone manufacturing. However, excessive
competition from the fast growing Smartphone business and increasing competitors, forced
the company to take up new strategies. Microsoft on the other hand, was of the view of
entering the Smartphone business with their new Windows OS. This made both the company
to decide on an acquisition strategy in which Microsoft would acquire Nokia and offer its

3
MANAGERIAL ECONOMICS
technology to develop new phone (Ali-Yrkkö, et al., 2013). However, this had detrimental
effect on the both the company as well as on the economy.
Impacts of merger and Acquisition
Managerial economics is termed as a branch of economics in which it deals with the
concepts and methods of business. The managerial economics analyses the effect of various
business strategies based on microeconomics concepts (Hirschey, 2016). The merger and
acquisition that took place between Microsoft and Nokia can also see such affect. Merger is a
transaction that takes place between two companies. During merger two companies joins
their operation and try to make use of their best resources and techniques in order to get the
best out of the merger (The Verge, 2017). On the other hand, acquisition takes place when
one company acquires the business and operation of another company. However, such
mergers and acquisition has both positive and negative effect. Positive affects leads to
increase in an increase in profit and revenue of the company and negative impact leads to
increase in cost and reduction in profit (Buckley, & Clegg, 2016). However, most of the cases
in the past has shown a failure from the acquisition and offered disappointing results. Most of
the positive impact that results from acquisition is to grow, become competitive, economies
of scale and achieve domination (Keizer, 2017). However, the opposite impact happens when
the acquisition between two companies fails. Both positive and negative impact of acquisition
falls on the economy as a whole as the consumers are the one that are affected directly due to
such business strategies. Thus, the all round effect of acquisition that affects the economy is a
part of managerial economic analysis (Von Kalinowski, et al., 2016).
Microsoft and Nokia Acquisition
With the rising environment of innovation in the technology sector both the company
decided to merge in the year 2010, to make use of the each other competitive advantage and

4
MANAGERIAL ECONOMICS
knowledge. However, in 2013 it was seen that Microsoft decided to takeover Nokia and its
operation of manufacturing Smartphone. However, the acquisition made many financial
experts to advice Microsoft to alter their investment plan. According to them, the investment
could have been used in some better place rather than this acquisition (Fakhrutdinova et al.,
2015). However, such kinds of acquisition has been seen from long time as the most useful
and common strategy of corporate. Even though acquisition proves to be a success mantra for
most of the markets, yet the rate of success has been very low in the past. In such situation,
the decision of Microsoft to acquire Nokia was a very uncertain and unplanned strategy from
the company.
Microsoft has always been one of the best software producing company in the world.
However, the company faced severe competition from famous companies like Apples as they
were undertaking the computer market by manufacturing hand held computers through
Smartphone. This forced Microsoft to formulate new strategy and take up one of the
successful company in the information technology sector in order to grow fast in the
Smartphone business. Such acquisitions do have some beneficial effect on the company
initiating the acquisition and on the economy as well. Microsoft too implemented this
strategy with the aim of gaining from this acquisition such as to acquire the success of Nokia
and to increase its market share in Smartphone business (Ali-Yrkkö, et al., 2013).
The acquisition took place in 2014 in which Microsoft invested $7.2 billion to acquire
Nokia with the aim of performing incredibly in the information technology sector. The
acquisition that took place showed some sign of benefit at its initial stage as the employment
in Finland grew by 1 percent (Ali-Yrkkö, et al., 2013). Te increase was both due to increasing
job opportunities in Microsoft and Nokia. However, just after few years of operation,
Microsoft CEO was of the view that the company is down turning the value of the phone that
the company has acquired from Nokia. Thus, for the reason the company decided to cut down

5
MANAGERIAL ECONOMICS
jobs and failed to capture the market share that they aimed. Such job cuts lead to an increase
in the unemployment rate in the economy affecting it negatively. An increase in
unemployment further leads to a lot of other negative effects such as fall in purchasing power
of the people with a further fall in demand from consumers.
After marks of the Acquisition
The acquisition proved to be a failure as days passed for both the companies. This was
due to the inadequacy of the officials of Microsoft to forecast the cost and benefits it will
incur in future. The cost that the company incurred due to the acquisition was seen with the
layoff of 7800 employees. Further, the layoff led to restructuring cost of $850 million to the
company and a $7.6 billion impairment charge (Kharpal, 2017). The Microsoft bared this
capital cost because of the acquisition, which proved to be a big failure. The company failed
to understand that its strategy of acquiring Nokia has turned in a negative way. Rather than
bringing up their phone business, the company faced a failure of downturn. Profit and
revenue were reduced largely, which changed the beneficial effect that Finland faced just
after the acquisition. The deal was thus, stated as a Buddy Deal which took place between
both the CEO of the companies. Microsoft was seen to be losing almost $8 billion from the
acquisition that it took back in 2014 (Fortune, 2017). The company failed to analyze the cost
that it would incurred due to the acquisition and the profit that it will lose. The company
initially hired around 25,000 employees in the business from the Nokia. However, as the
business started experiencing a downfall the company laid off maximum employees of
Nokia. Such continuous failure of the merger led to the downfall of Microsoft. Thus, a failure
to analyze the actual effect of the acquisition has led to failure and thus it is impossible to
know the true reason for such a decision.

6
MANAGERIAL ECONOMICS
Impact of Failure on the Economy
The acquisition that took place showed a lot of affect on Microsoft that can be related
to managerial economic analysis. A managerial economics shows the economic affect and
problems that an economy faces due to various business decisions; similarly, acquisition
decision taken by the company has led to various detrimental economic effects. The positive
affects was viable at initial stages of acquisition due to an increase in the employment level in
Finland (Business Insider, 2017). However, the period following such increase saw negative
impact of such acquisition. The negative effects were the rise in unemployment due to
layoffs, fall in GDP and purchasing power due to reduction in profit and revenue. These
impacts further led to other affects on the economy such as low growth of informational
technology, increase in unemployment and lowering demand for other goods due to job loss.
Thus, it can be seen that the affect of acquisition on economy has a chain affect, one after the
other (Fortune, 2017).
The affect of acquisition of Microsoft did not stop there as both the companies faced
further impact on its operations. It was seen that Microsoft started performing badly on phone
manufacturing and sold most of the phones to a Taiwanese hardware market with the brand
name of Nokia. The company took a financial of $350 million on behalf of the phone
(Violeta & Camelia, 2016). Just after selling the phones, the company laid off further
employees from its Nokia units. With such an action, Microsoft saw a retreat from the
Smartphone market and faced a loss on the challenge that it gave to other Smartphone
companies like Apple and Google. The total sales of Window phones experienced a drastic
downfall in the market accounting just 0.7 percent of the total Smartphone sold worldwide
(Business Insider, 2017).

7
MANAGERIAL ECONOMICS
Present condition of Nokia and Microsoft
It was seen that after the affect and downfall of this acquisition both the companies
disappeared from the Smartphone business. Microsoft took away itself from the business and
stopped selling Nokia phone (Fakhrutdinova, et al., 2015).. However, the company has
planned to introduce its own Smartphone with some unique and demanding features in near
future with its own technology ad name. The phones will mainly be targeting the commercial
sectors as customers and will induce features that will help the commercial people. On the
other hand, Nokia has made a comeback with some new android phones and did not use
Windows on their phones. Some of the top professionals and technical head of Nokia that left
the company after its acquisition with Microsoft have made the comeback with new Nokia
phone models (Kharpal, 2017). . The company now expects a growth from its comeback as it
had before the acquisition took place. This will also have a lot of positive impact on the
economy. One of the significant positive impacts that will take place is increase in
employment that was affected due to the acquisition. The chain affect of employment
increase will be increase in purchasing power, increase in demand and improving condition
of the economy.
Conclusion
From the above analysis, a conclusion can be reached that the acquisition and merger
that took place between Nokia and Microsoft prove to be a great failure having various
negative affect after its completion. The acquisition took place due to various reasons in 2014
in which Microsoft acquired Nokia with the aim of entering its business in the growing
Smartphone business. However, various after effects were seen due the acquisition. The
major effect was the loss of employment of most of the employees of Nokia, which increased
the level of unemployment in many regions. The rate of unemployment increased drastically

8
MANAGERIAL ECONOMICS
due to this acquisition in areas where the company existed. Moreover, this led to decrease in
GDP and other negative effects on the economy. This eventually led to the downfall of the
companies due to fall in their profit and revenue. Thus, as a result for such an effect of
acquisition, Microsoft withdrew itself from the manufacturing business of Smartphone.
Nokia on the other hand sold its business and went out of operations. However, both the
companies are recently planning to come back with their own manufacturing plan. Nokia has
already made a comeback in the market with the professionals that left the company after the
acquisition. Microsoft on the other hand is planning to introduce its own Smartphone for
commercial use.

9
MANAGERIAL ECONOMICS
References
Ali-Yrkkö, J., Kalm, M., Pajarinen, M., Rouvinen, P., Seppälä, T., & Tahvanainen, A. J.
(2013). Microsoft Acquires Nokia: Implications for the Two Companies and
Finland. ETLA Brief, 16(3).
Buckley, P. J., & Clegg, J. (Eds.). (2016). Multinational enterprises in less developed
countries. Springer.
Business Insider. (2017) Microsoft Closes Its $7.2 Billion Purchase Of Nokia. Retrieved 17
November 2017, from http://www.businessinsider.in/Microsoft-Closes-Its-7-2-
Billion-Purchase-Of-Nokia/articleshow/34206369.cms
Fakhrutdinova, E. V., Fakhrutdinov, R. M., Kolesnikova, J. S., & Yurieva, O. (2015). New
Start of Nokia. Mediterranean Journal of Social Sciences, 6(1 S3), 61.
Fortune. (2017). Can we agree that the Nokia buy was a total disaster for Microsoft?.
Retrieved 17 November 2017, from http://fortune.com/2015/07/08/was-microsoft-
nokia-deal-a-disaster/
Hirschey, M. (2016). Managerial economics. Cengage Learning.
Keizer, G. (2017). Microsoft writes off $7.6B, admits failure of Nokia
acquisition. Computerworld. Retrieved 17 November 2017, from
https://www.computerworld.com/article/2945371/smartphones/microsoft-writes-off-
76b-admits-failure-of-nokia-acquisition.html
Kharpal, A. (2017). Nokia phones are back as Microsoft sells mobile assets to
Foxconn. CNBC. Retrieved 17 November 2017, from

10
MANAGERIAL ECONOMICS
https://www.cnbc.com/2016/05/18/nokia-phones-are-back-after-microsoft-sells-
mobile-assets-for-350-million-to-foxconn-hmd.html
The Verge. (2017). Microsoft wasted at least $8 billion on its failed Nokia experiment.
Retrieved 17 November 2017, from
https://www.theverge.com/2016/5/25/11766540/microsoft-nokia-acquisition-costs
Violeta, S., & Camelia, S. M. (2016). PURCHASED GOODWILL IN INTERNATIONAL
ACQUISITIONS. MICROSOFT-NOKIA CASE. THE ANNALS OF THE
UNIVERSITY OF ORADEA, 727.
Von Kalinowski, J. O., Sullivan, P., McGuirl, M., Folsom, R., & Fine, F.
(2016). Determining Legality and Defenses (Vol. 2). Antitrust Laws and Trade
Regulation, Second Edition.