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By Ritsuko Ando and Bill Rigby
HELSINKI/SEATTLE, Sept 3 (Reuters) - In an era when shinynew tech start-ups can be worth tens of billions of dollars,Microsoft's deal to acquire Nokia's mobile handset business for5.44 billion euros ($7.2 billion) is a modest one from astrictly financial point of view.
Yet the deal is likely to go down as a major turning pointin the contemporary technology business, one that marks the endof a Finnish company's unlikely run as world-beating tech iconeven as it shapes the future of Microsoft Corp - forbetter or for worse.
In Finland, politicians and business leaders mourned thefall of Nokia, while pensioners wondered what it all meant for them. In Seattle, the chatter centered on what thedeal might say about the race to succeed Microsoft ChiefExecutive Steve Ballmer, who announced 10 days ago that he wouldstep down within a year.
For the global telecom industry, meanwhile, the deal signalsfurther consolidation, coming just a day after Verizon announced a $130 billion deal to buy Vodafone's stake inits wireless unit. It could also help Microsoft achieve itslong-held ambition of becoming a major rival to Apple and Samsung in the global smartphone business,though it will also put even more pressure on the company toshow that its massive investments in consumer devices makesense.
The Nokia deal "unequivocally suggests they aren't exitingthe business and in fact are doubling down on mobile," said ToddLowenstein, a portfolio manager at HighMark Capital Management,which holds Microsoft shares.
"They can in all likelihood carve out a decent niche withtheir scale as a fully integrated player, however investors arequestioning the merits," Lowenstein added. "The markets havespoken volumes." Microsoft shares finished down 4.6 percent onTuesday.
Nokia and Microsoft have been joined at the hip since early2011, when the Finnish company agreed to adopt Microsoft'sWindows Phone software for its smartphones - a big gamble forNokia, but one that came at a time when the company's marketshare was already in a freefall and it had few good options.
Since then Nokia has produced a series of Windows-poweredphones that were mostly well-reviewed by critics, though largelyshunned by customers.
There had been speculation from the start that Microsoftmight eventually buy Nokia, but many analysts thought Microsofthad the best of both worlds - a committed hardware partner, butnone of the considerable downside risk that might go with owninga phone-maker.
Behind the scenes, though, friction developed, according toa source familiar with the situation, especially after Microsoftlaunched its Surface tablets last fall.
"Each was trying to spend money on app developers, musicstores, all the parts critical to the ecosystem," said thesource. "It all came to a head at the end of last year,beginning of this year - was this really the right way to workor are we better as one entity?"
Discussions on an acquisition began in earnest in February,after Ballmer approached Nokia for an "open dialogue." Ballmerand Nokia board chairman Risto Siilasmaa met at the Mobile WorldCongress in Barcelona. After a few hiccups the negotiationskicked into high gear in July, with almost 50 board meetings onthe part of Nokia.
Another source close familiar with the negotiations said thetiming of the deal, which was called "Project Gold Medal" atMicrosoft, was influenced by Ballmer's announced departure, withNokia seeking to wrap it up before a new CEO was named. Nokiaofficials were concerned that if it delayed it could end up withfacing a firesale down the road as its cash position worsened,the source said.
For Microsoft, moving ahead with a major strategicacquisition even as it seeks a new CEO reaffirms its commitmentto being a broad-based "devices and services" company - astrategy crafted by Ballmer and one which was at the heart of amajor reorganization announced just weeks ago.
On Tuesday, Microsoft called the Nokia deal "a huge leapforward on our journey of creating a family of devices andservices that delight people and empower businesses of allsizes."
People close to the situation rejected the idea that thetransaction meant that Nokia CEO Stephen Elop, a formerMicrosoft executive who will rejoin the company as head of thedevices and services division, would automatically succeedBallmer. But analysts said the move could make it harder tobring in an outsider CEO who might want to revisit all aspectsof the company's strategy.
FINLAND'S NATIONAL CHAMPION
Tuesday's deal marks the breakup of a company almostembedded in Finnish DNA, a once-proud symbol of Nordicentrepreneurial engineering prowess and design. At its peak itaccounted for 40 percent of the world's mobile phones, a fifthof Finland's exports and four percent of its GDP, and had amarket value of close to $300 billion.
Barely a decade ago, consumers talked about Nokia with thesame bated breadth as they do about Apple today, marvelling atits sleek but practical designs. But its abrupt fall symbolisesthe breakneck speed and unforgiving competition in consumerelectronics, where nimble rivals can quickly upset establishedindustry leaders.
Nokia itself has had plenty of experience in reinventionover its 148-year history. From its beginning as a papermanufacturer in 1865, it grew to make everything from rubberboots to televisions, and eventually its brand name was evenemblazoned on lavatory tissue.
Its modern incarnation began under Jorma Ollila, who headedthe cellphone unit beginning in 1990 and then, as chiefexecutive, transformed the Finnish conglomerate into a globalhandset leader. Its brand name was often mistaken as Japanese,something that at the time delighted a company whose homecountry was harder to sell globally.
"It was something Finland hadn't had, this major consumerbrand," said Mikko Makipaa, an entrepreneur, recalling his daysat the company from 1996 to 2009.
But Ollila was blamed for being late to recognise the threatof Apple's iPhone and the smartphone revolution. A report by theResearch Institute of the Finnish Economy said Nokia developedtouch-screen phones three years before the iPhone and a tabletas early as 2005, but they never reached the market.
Elop's appointment in 2010 was hailed for bringing Siliconvalley zip into the struggling company as rivals led by Applewere gaining market share in high-end smartphones even as Asiancompetitors were eating away at the cheaper, simpler end of thehandset market.
A Canadian with five children and an amateur pilot who hadpreviously headed Microsoft's business division, Elop was thefirst non-Finn to head Nokia. At his first press conference -broadcast live on Finnish TV - he played up his love for icehockey, a passion many Canadians share with Finns.
His enthusiasm quickly endeared him to staff, but he wasalso blunt. In a now-famous 2011 email to staff, he comparedSymbian - Nokia's then operating software - with a "burningplatform" that needed to be abandoned. It was dropped in favourof a largely untested alternative from Microsoft.
One in three jobs were cut, and one source who was there atthe time said the memo was ill-advised because it destroyedsales of Symbian before the Windows phones were ready. Still, itwas mostly seen as the sort of bold stroke needed to rescue theflailing company.
Now Elop is viewed in a different light. "A Trojan horse,"the widely-read tabloid Ilta-Sanomat declared in a column onTuesday.
"It sounds like a betrayal to me," said Finnish pensionerPaivi Rengman.
In fact, many in Finland saw the deal as a sign of deepermalaise within the Finnish economy and its celebrated Nordicwelfare model.
"For Finland, Nokia is emotional and symbolic. My generationgrew up with a Nokia in their pocket. We view the deal inFinland as the end of an era," said Alexander Stubb, Finland'sminister for European Affairs and Foreign Trade.
Nokia is not disappearing, and will now concentrate on itsnetworking equipment unit, navigation business and technologypatents.
Optimists say it is not the first time Nokia has taken a bigbet. In the early 1990s it sold off businesses that accountedfor around 70 percent of its sales to focus on telecoms. Thatfollowed the collapse of the Soviet Union, which halted a highlyprofitable cross-border trade.
Finland also remains one of the few countries in the eurozone with a triple-A credit rating. But its reputation as anegalitarian society with top-notch education and health services belies worries about its once-mighty export manufacturers and rapidly ageing population.
"This is a major challenge for Finland," said TeroKuittinen, an analyst at Alekstra. "Microsoft is unlikely tokeep any meaningful handset R&D or production in Finland.
"In 2007, Finland had 60 percent of the global smartphonemarket. That will now plunge to zero percent - a massive blowfor a country that bet so much on mobile technology," Kuittinenadded.
To a certain extent, Nokia's decline may have inoculatedFinland against a sudden shock. At its peak, Nokia accounted for4 percent of Finnish GDP and supported myriad suppliers. Todayit contributes closer to 1 percent, according to analysts.
Many former Nokia employees have helped to spawn a growingIT industry, symbolised by fast-growing Rovio, maker of thepopular Angry Birds game.
Kuittinen said that Rovio's Angry Birds empire has racked upnearly 2 billion downloads while Supercell, another gamecompany, is getting close to $100 million in monthly revenuefrom its two blockbusters, Hay Day and Clash of Clans.
"The problem is that these two companies combined only have700 or so employees," Kuittinen said.
But for an upcoming generation, nostalgia about Nokia mayhave been supplanted by straightforward realism.
"Their share price is all that I'm interested in," said a28-year-old business student named Aleksi, who declined to givehis last name. "I don't understand this crying about nationaltreasure being sold. People seem to think it's the year 2000.Business is business. Nokia is not defining Finland."
For the global tech business, the big question is to whatextent Nokia will define Microsoft. Activist shareholders, ledby ValueAct Capital, have urged the company to stop spending soheavily on consumer products and instead return money toshareholders.
Microsoft's track record in both consumer devices and majoracquisitions does little to inspire confidence. Yet it remainsamong the very few firms with the muscle to challenge the marketleaders in smartphones.
"I continue to believe that there is enough innovation indevices, unlike some of our investors, that it will be a growthopportunity in terms of the financial reward to the bold, to theinnovative who pursue it," Ballmer said Tuesday in explainingthe deal to analysts.
He also called the phone business "the best opportunity forpursuing users in very, very large numbers." As Nokia learnedthough, translating opportunity into success is the hard part.
