Merger of Microsoft and Nokia - Research Paper Example

?Running head: MICROSOFT AND NOKIA MERGED Microsoft and Nokia Merged INTRODUCTION In the recent phenomenon, merger, as a strategic tool, has been used by few large companies in the Information Communication Technology (ICT) industry to gain a competitive advantage by lowering costs in their value chain and efficiently differentiating their brands from that of the competitors to obtain a higher level of customer loyalty1. With the same intention, Microsoft Corporation and Nokia Corporation recently entered into the merger process with the similar intention of providing their customers with integrated mobile technology, simultaneously facilitating the expansion of their business at a larger scale. Microsoft and Nokia are both renowned and well-known ICT companies, where the former specializes in user convenient communication software systems and the latter holds a distinct position amid its customers in the mobile communication industry. As per analysts’ reviews, the merger between Microsoft and Nokia also served the purpose of meeting the needs of their customers and further expanding their business size, along with bringing success in their own respective fields2. In order to gain an in-depth understanding about the merger process between these two ICT giants, i.e. Microsoft and Nokia, it is necessary to overview the background of the companies and to understand their needs of entering into the contract. Microsoft, founded in the year 1975 in State of Washington, operates its business through the development, manufacturing and licensing of variety of software products and also computer hardware devices3. Apart from this business, the company has recently expanded in the fields of manufacturing telephonic devices such as tablets, which can also be considered as one of their recent expansion strategies that required a beneficial market penetration strategy. Due to its huge turnover and advanced technology innovation capacity, Microsoft has emerged as one of the successful technology companies in the entire world in the current decade4. Correspondingly, Nokia is a Finnish company, which placed itself in a remarkable position in the history, by creating the first radio phone in 1963. Since then, the company has been successful in manufacturing more of the modern and advanced technological communication appliances in the international market. Nokia became more popular in the entire world with the production of small and comfortable mobile phones and following the introduction of the integrated technology. It is also considered as one of the fastest growing companies in the present competitive environment and also as a responsible company, which accepts the suggestions of its customers as well as believes in equal treatment to all its employees5. THESIS STATEMENT This research paper has been prepared with an intention of gaining knowledge on the incident of the merger that has recently taken place between Microsoft and Nokia in the year 2012. Correspondingly, the major sections that have been described in this research paper are the reasons for the merger, advantages that both the companies have derived and also the possible drawbacks of the incident to critically assess the worthiness of the strategy. REASONS FOR MERGER BETWEEN MICROSOFT AND NOKIA In recent news article named “Why Microsoft really bought Nokia” one of the journalists named Robert X. Cringely remarked that the incident of the merger between Microsoft and Nokia was somewhat like “two stones clinging together trying to stay afloat”6. The reason for quoting these words implies that the incident was really a matter of interest for all the giant companies around the world. In the process, Microsoft acquired Nokia at a compensation price of 7.2 billion US dollars in 20127. A tender offer was considered as the major mode of acquisition in case of merger between Microsoft and Nokia. Subsequently, Microsoft made a proposal to the majority of the shareholders of Nokia with an intention to buy the exceptional stocks of the company at a reasonable price. During the proposal, almost 51% of the shareholders of Nokia had accepted the proposal of Microsoft, which indicated to a green light sign for the company. The acquisition and controlling process estimated from the beginning was that Microsoft would definitely acquire Nokia in the future. Microsoft possesses a larger dimension of business than Nokia in the existing business scenario and also has the availability of equity fund in lump sum owing to which, Microsoft could acquire Nokia with minimum hurdle. In comparison to that of Microsoft, Nokia has a more concentrated ownership structure due to which, the merger and acquisition became simple for Microsoft8. There are many other reasons due to which the process of acquisition was quite favorable for Microsoft and the control of the entire process also remained with the company, offering Nokia with limited independence. A team of leaders, which was led by Mr. Stephen Elop, former CEO of Nokia, also became one of the reasons for the merger between the companies as Stephen gave much interest in the proposal of Microsoft as he was also the ex President of Microsoft and knew that Microsoft could uplift the smart phone business of Nokia which was failed in the market9. Stephen knew that Microsoft had the greater potential to handle the entire business of Nokia and also it could better implement strategies for improving those products in which, Nokia had already failed to derive success. The primary driving force that motivated Microsoft to opt for the proposal of acquisition to Nokia was to mitigate its deficiency in terms of inadequate knowledge of the smartphones and handset devices business. Thus, it was expected that the company’s liaison with Nokia would be beneficial for Microsoft to expand its business in the field of mobile handsets and devices. Under such circumstances, Microsoft attempted to take advantage of a strong and reliable position in the division of mobile phones and handsets, similar to Nokia, in the current market scenario. Microsoft could derive maximum benefits from the acquisition as it already possessed a strong brand name and reputation among the valuable customers and the potential markets of Nokia. Almost a huge proportion of Microsoft’s customers believed that it would surely derive significant benefits in the business of smart phones and other handsets just like it did in the field of computer software manufacturing and developing10. Another reason for entering into merger by both the companies can be evidently related with their need to improve their innovative performances and competitive industry presence. To be noted in this regard, Nokia had to suffer significantly due to loss in its smart phone section. It was thus expected that the merger will assist the company to develop a differentiated network, offering its customers with software and hardware packages into a unified manner, similar to its major rival, i.e. Apple11. Again, in the similar context, the marketing experts of Microsoft estimated that although the company has been involved in the sale of software for personal computers, the two-third of the products that are being sold in the global market, accounts to be either tablets or smart phones. Along with this, they also estimated that the sales trend would possibly change in the upcoming future and Microsoft could make a successful move towards the business of not only smart phones and tablets but also to other integrated devices or technological equipments. The CEO of Microsoft Corporation, Steve Ballmer, who was among one of the major negotiators in the event of merger with Nokia seemed to believe that Microsoft would also be one of those companies, which will be able to turn Nokia’s mobile phones into an effective element of the telephonic communication market and also be an effective weapon to fight against few of its strong competitors, namely Apple’s iPhone and iPad and also the android software of Google Inc. Thus, from the aforesaid reasons it becomes clear that the merger between Microsoft and Nokia can be considered as a tool to gain advantage in the competitive fight against the other existing strong competitors in the market along with raising the profit margin of the companies through mutual benefits12. Correspondingly, Nokia also agreed to the proposal, which was, as per the critics, linked with its failure in the manufacturing and sale of the smart phones in the global market to achieve the competitive advantages along with facilitate its survival in the global market13. A comparative and in-depth understanding of the situation revealed that the most important reason for the acquisition was the transaction cost of the companies. It was observed in this regard that when the proposal of acquisition was presented to Nokia, both the companies deciphered a degree of reluctance in delivering much effort in collaborative tasks of developing the software and hardware for their smart phones. During the course, the absence of non-cooperation between the companies gave rise to huge transaction costs. Thus, both the companies decided to share the similar brand name and give equal efforts to the reduction in the transaction costs and raise the popularity of the smart phones that were initially introduced by Nokia. After immense discussion and critical evaluation of the associated pros and cons to the merger, the European Commission ultimately gave a green signal to the companies to follow up the formal procedure. However, the follow-up of the merger remains under deep scrutiny till date, whereby critics have been involved in anticipating the future turn in the competitive scenario of the global as well as Finish telecommunication industry14. Taking into account the recent arguments centered to the merger of these two conglomerates, it can be justifiably affirmed that the approval given by European Commission has polarized the industry experts in two dimensions, wherein one focuses on highlighting the pros of the merger for Microsoft and the other has been concentrated on the rationality and implications of the decision on Nokia’s future15. ADVANTAGES OF MERGER TO MICROSOFT AND NOKIA Microsoft Corporation. During the merger between Microsoft and Nokia, Microsoft had actually hired many of the employees from the production department of smart phones of Nokia along with the entire smart phone business. In total, Microsoft had acquired the entire operations of mobile phones of Nokia along with its 32,000 employees. It has also been one of the advantages to Microsoft as it got the control over the operations along with the required number of experienced staff holding sufficient knowledge for the manufacturing of the mobile phones. It has also been observed that in comparison to Nokia, Microsoft had derived lesser benefits from the acquisition process. The major beneficiary in the merger was Nokia, as its one of the product was unable to gain competitive advantage in the global market. The benefit that Microsoft could derive from the merger was that apart from exploring success in the field of software and hardware devices, it could also expand its business in mobile phones and smartphone devices. The acquisition process improved the position of Microsoft in the eyes of its customers and also facilitated customer loyalty to a substantial extent. This statement explains that nowadays, most of the young generations are interested in possessing smart phones along with the integrated installation of hardware and software to obtain the benefits of a convenient communication experience. Microsoft has been able to capture the customer’s attention and attain competitive advantages in the global market, where it is having strong competitors such as Google and Amazon16. Nokia Corporation. Since Nokia had failed in marketing its smart phones and similar other mobile devices successfully, its merger with Microsoft was replicated as an assistance by the latter to the former in obtaining a competitive momentum in the industry17. With the merger, Nokia is expected to be able to uplift its organizational performance in the field of selling smart phones and devices and re-earn the amount of losses that it had to suffer, owing to its failure in the smart phones segment. Microsoft’s proposal for merger proved to be a remedy through which Nokia could overcome its challenges faced during the sale of the smart devices and phones. As this merger is not like other mergers and acquisitions; rather it is a collaborative effort to uplift the smart phone business of Nokia, it is expected that Nokia can anytime enter the market with a huge brand name and customer awareness affecting the larger interests of Microsoft18. As a result of the merger, Nokia recorded a hike in its total shares, which accounts to be 35% and also was successful in raising its business of smart phones and devices in the current scenario19. DRAWBACKS OF MERGER TO MICROSOFT AND NOKIA Microsoft Corporation. The European Commission had given a green signal for the merger between Microsoft and Nokia after the complete inspection of the program under EU Merger Regulation. But after the inspection, it concluded that this merger would not be considered as competition and thus regulated certain restrictive actions for Microsoft, which also proved to be the limitations for Microsoft. After the merger, Microsoft was restricted to supply its Windows operating systems to other mobile companies, which limited its growth potentials with Nokia. It was also restricted from supplying its few of the mobile applications such as Skype and Office suite apps to the competitors of Nokia, rewarding Nokia a monopolistic power in the industry. The other limitation that Microsoft was facing due to the merger was that it had lost the capacity of restricting the competition between the Microsoft’s mail server software and the smart devices of the other companies in accordance to the contractual terms and conditions mentioned in the merger process. The European Commission quoted in response to all these restrictions levied on Microsoft that it was formulated with the intention to avoid or rather limit the chances of unhealthy competition within the industry as a result of the merger and acquisition. But with this conclusion, Microsoft was facing huge problems in the operation of its other units of business. As per analysts, Microsoft is quite likely to witness issues in the process development and competitive networking of its other software and hardware developing units, which is commonly regarded as its primary business, other than focusing on the development of smart phones, which it had acquired from Nokia20. Apart from these issues, Microsoft also accounted to have a huge downfall in its shares which is recorded to be more than 5%. Another issue which is being seen in the present scenario is that many of the customers of Microsoft is making complaints that Microsoft is too slow in responding to the booming market of mobile phones business and is not able to provide adequate services to the customers21. Nokia Corporation. In comparison to Microsoft, Nokia was the least sufferer of any kind of problems from the merger between the companies. Even after so many restrictions levied on Microsoft by European Commission, it was quite successful in expanding its business size; while on the other hand, Nokia received assistance in rebuilding its image in the international market and achieving success in its smart phone sector, which had failed earlier. Due to the merger process, Nokia lost many of its employees as Microsoft had acquired the company along with the employees of production department and maximum of its productive employees. There is a high possibility that the shareholders of Nokia had backed out from making further investments in any other project of Nokia just after its failure in the smart phones segment. The higher authorities of Nokia also deciphered a certain degree of fear concerning the reduction in its employee force in the concerned departments, after the merger took place between both the companies. Usually, in the merger and acquisition process, a huge loss of employees and the same happened with the Nokia Corporation as well. The reduction of the employees in huge proportion most of the time leads to the damage of the assets of the company and also creates various barriers in the path of efficient continuation of the organization in its post-merger phase22. Nokia was also facing immense problems in the redesigning of the internal control system of the company with the newly merged company i.e. Microsoft. It is also estimated that within 2014, maximum of the employees of Nokia will be transferred to Microsoft and there will be huge reduction in its number of employees23. Thus, from the aforesaid study, it can be concluded that Nokia was the least sufferer of the merger as it faced problems of reduction in its number of employees and many of its shareholders had backed away from making further investments in Nokia as its one of the business of smart phones had failed and it got into merger with Microsoft. CONCLUSION From the above discussion, it becomes apparent that the merger between Microsoft and Nokia was a remarkable incident in the world of communication and ICT companies. Being two giant companies operating in the distinct but supporting fields like mobile communication and computer software developer, their merger led the entire merger and acquisition process into a different paradigm in the industry structure. Fundamentally, mergers have been usually considered as a strategic action of overtaking the weaker company by the larger one with the sole intention to obtain competitive advantages through monopolistic power obtainment. Similarly, the merger between Microsoft and Nokia was led with the intention to obtain sustainability and competitive advantages in the existing market structure, where both the companies were facing challenges due to the innovative operations conducted by their common rivals. For instance, the recent past performances of the companies revealed that where on one hand, Nokia was unable to make its significant position in the market for the sale of smart phones and devices; on the other hand, Microsoft was also planning to penetrate the mobile industry to gain a better competitive positioning in the global marketplace. In such situation, Microsoft proposed Nokia for purchasing the particular sector of smart phones as a market penetration strategy in the mobile communication field, apart from the computer software and hardware developing segment. It was also observed that the major beneficiary of the entire merger was Nokia Corporation as it got the complete assistance from the other company in developing one of its units. In this course, although the first proposal of merger was made by Microsoft, it had to undergo many of the restrictive policies laid down by the European Commission making a thorough inspection of the merger and acquisition process. To be mentioned, European Commission laid down policies that restricted Microsoft from entering into the supply chain activity of other mobile manufacturing companies, apart from Nokia. Microsoft could not also enter into any kind of collaborative business with any of the competitors of Nokia after the merger. Due to these policies, Microsoft had a drastic downfall in its shares in the global market and also had to face a lot of complaints from its customers such as unable to respond properly in the booming market of smart mobile phones24. Apart from all these limitations, Microsoft has been able to extract certain benefits from the entire process of merger. Using the merger as a penetration strategy, Microsoft should focus on differentiating its brand and step forward in the business of smart phones independently to accomplish its ultimate objective from the merger, i.e. to become a leading company in the sector. On the other hand, Nokia was able to raise its shares in the market up to 35% after the merger with Microsoft and also augment its brand positioning in smart phones and devices retailing sector, overcoming its previously criticized poor performance. It is worth mentioning in this context that the merger between the giant companies has evidently brought about a change in the market scenario as it assisted both the companies in achieving competitive advantages and a certain degree of monopolistic power in the global context. The merger was beneficial for both the companies as both of them could progress in the achievement of competitive advantage in the monopolistic market of mobile and computer devices. Read More