Mergers and Acquisitions - Microsoft and Nokia - Case Study Example

Mergers and Acquisitions Realizing economies of scale and scope According to Que and Zhou (2007), mergers and acquisition decisions are stimulated bya solitary motive of cutting down on expenses, enhancing market power and minimizing unpredictability of earnings, thereby realizing economies of scale and scope. Such has been the case of Microsoft’s acquisition of Nokia. One of the underlying reasons behind Microsoft acquiring Nokia was to take advantage of the opportunity to minimize cost by avoiding overlying activities and amalgamating back-end operations, so as to achieve economies of scale and scope (Campa and Hernando, 2006; Pedro and Marques, 2014). In addition to that, Nokia also has the economy of scale required to meet the rising global demand for mobile phones as well as to ground network infrastructure through its Nokia network division, so as to enter new markets, gain competitive advantage and make mobile phones usable seamlessly in any market. Microsoft, on one hand, wanted to diversify its product portfolio by gaining entry into the mobile phone manufacturing market and utilize the best of Nokia’s resources (Moeller, Schlingemann and Stulz, 2003; Martynova and Renneboog, 2008; Liao and Williams, 2008). On the other hand, Nokia can utilize the strong brand name of Microsoft and continue its process of bringing upon developments in its feature phones. It is widely known that M&A decisions are taken in order to adhesive synergy and this is very prominent in this mega deal between Microsoft and Nokia (Mitra, 2013). Economies of vertical integration In a competitive market like, the one that exists presently, it is very apparent that vertical integration is a way forward for a company to ensure its success and sustainability (Ando and Rigby, 2013; Lai, Chine and Chang, 2010 Nikolaosa and Yiannis, 2013; Yoo, Lee and Heo, 2013; Quinn and Hilmer, 1994). Now is the pivotal moment for Microsoft, which earns a significant proportion of its revenues from the Windows operating system, office suite business software as well as the XBOX gaming console. Now would be the time for the company to achieve significant competitive advantage against its competitors by utilizing resources that it can avail from its vertical integration with Nokia (Brickleya, Linck and Smitha, 2012). Microsoft has become a vertically integrated mobile device company that possesses the ability to design everything related to its mobile products, starting from the operating system to designing looks and technicalities of the hardware. Through vertical integration, the company did not just buy an existing unit and sales that the unit generates, but they have also acquired an entire operational unit that can be integrated from top to bottom (Rowinski, 2013). In order to respond to market forces, Microsoft needed to vertically integrate with an established manufacturer, like, Nokia. By doing so, the company will be able to conquer the already crowded Smartphone market (Lee, 2013). Combining complementary resources Microsoft and Nokia decided to form a wide strategic partnership in order to use each other’s complimentary expertise and strength and also, develop a new global mobile ecosystem, thereby achieving significant competitive vantage against its rival mobile device companies (Belso-Martinez, Molina-Morales and Mas-Verdu, 2013; Servaes, 1991; Sudarsanam and Mahate, 2003; Warf, 2003). Both the companies aim to mutually develop pioneer mobile products and services to lead the market. The companies will adhere to gaining synergistic benefits by making use of the best qualities of each other in order to foster innovation in their products. This helps to offer their customers, operators and developers with unparalleled choice and opportunity. The underlying strategy for both the companies would be to focus on their respective core competencies and thereafter, make opportunity for rapid time to market execution (Fernandes, Gouveia and Pinho, 2012; Dutordoir, Roosenboomb and Vasconcelos, 2014; Rocha and Kupfer, 2002). Microsoft and Nokia plan to work in complete coordination with each other, so as to combine key assets and develop completely innovative product and service offerings, thereby extending their products and services to a completely new market and target customers (Microsoft, 2011). By combining the complimentary resources, Microsoft has the opportunity to create something that Google and Apple have not been able to create till date. The corporation can integrate desktops and mobile devices into a more seamless experience (Talbot, 2013). Elimination of inefficiencies M&A deals are becoming a disproportionately wide focal point among multinational corporations. Companies merge with each other or acquire another company with the hope that synergistic achievements will eliminate inefficiencies that prevail within both the organizations (Fuller, Netter and Stegemoller, 2002; Akbulut and Matsusaka, 2003). One such inefficiency is the rising cost of production. Such has been the case for both Microsoft and Nokia. Mergers and acquisitions always help to minimize the cost associated with production by avoiding overlapping operations and back-end activities (Stewart, 2013). Microsoft has acquired in order to realize potential advantages, which include attaining economies of scale and scope, garnering tax advantages, amalgamating complimentary resources and eliminating inefficiencies. Both the companies will adhere to eliminate operational and management inefficiencies, if required through complete restructuring of the organization by appointing new and efficient management and operational teams. If market for control that exists in the firm is highly efficient, then inefficient management teams would quickly be replaced by new ones (Eun, Kolodny and Scheraga, 1996; Epstein, 2004). Both Microsoft and Nokia should formulate efficient strategies by training their employees in order to perform each and every activity efficiently, so that cost and time efficiency can be achieved. The common operational units of both organizations can be integrated as production can be done in bulk volume through a single unit, instead of carrying out productions through discrete units. Increased power in the market Through the acquisition of Nokia by Microsoft, the latter does not only exhibit sensibility, it also supersedes expectations by facilitating an improved environment for mobile applications as well as greater market share for low-priced smartphones. Another reason that stimulated Microsoft to acquire Nokia is to enhance its power in the market by gaining entry into the mobile phone business (Segundo, 2013). This was a relatively cheaper deal for Microsoft, considering the fact that there was no other way the MNC could have gained entry into this segment. Microsoft, through this acquisition, can penetrate new geographic regions and gain entry into market, attain a wider customer base and henceforth, enhance its market power (Konstantopoulos, Sakas and Triantafyllopoulos, 2007; Triantafyllopoulos, Konstantopoulos and Sakas, 2012; Belcher and Nail, 2000). To put it simply, it is a very big world out there. This vertical integration enables Microsoft to focus on markets that fall beyond the United States and Europe. This is particularly because there is a huge growth prospect for mobile devices in the third mobile ecosystem. Microsoft can develop moderately priced ‘entry level’ mobile devices (smartphones) and target these products at consumers in emerging economies such as, Latin America, Africa and India. This is one way in which Microsoft can enhance its market power in these economies through manufacturing handsets that suit the purchasing power of their consumers. By doing so, Microsoft can boost its market share significantly and compete with the likes of Samsung, Sony, Google and Apple (The guardian, 2014). Speed of growth Management in Microsoft sincerely hopes that this alliance with the largest manufacturer of Windows phone will boost their growth prospects and henceforth, enhance its smartphones market share (Smith, 2013a). The company officials have already promised the attainment of increased synergies to its shareholders and stakeholders. The CEO of Microsoft, Steve Ballmer has stated that this alliance between Microsoft and Nokia is “a bold step into the future, a win-win for employees, shareholders and consumers of both companies.” By amalgamating, the talented and experienced teams of both companies will augment Microsoft’s profits and shares in the mobile phone segment throughout the world. Consequently, such outcomes will strengthen the overall prospect for both Microsoft and their partners, across the entire fraternity of products and services (Smith, 2013b; Microsoft, 2013). Following this acquisition, 32000 will be transferred across Microsoft, which includes 4700 employees in Finland and 18300 employees, who will directly be involved in manufacturing the product. Microsoft will not only be acquiring the Windows phone segment, but will also win the Nokia Asha segment feature phones. Therefore, they will be able to target even a greater customer base than the existing one and thereafter, increase the company’s market share and profit (Smith, 2013b). Financial benefits From Nokia’s point of view, the acquisition transaction is anticipated to be considerably accretive, as far as earnings are considered. This will strengthen the financial ground of the company, thereby providing it with a firm foundation to make future investments as well as to ensure the continuum of its business (Nokia Corporation, 2013). From the financial side, this €5.4 billion spending seems to be considerably of good value for Microsoft. This value is prominent when the patent licensing is evaluated in more detail. Moreover, when compared to the price that Microsoft had to pay for acquisition of Skype ($8.5 billion), the price it pays to acquire Nokia ($8.1 billion) is relatively cheaper (Blandford, 2013). Through this deal, Microsoft believes that they can boost the gross margin on each and every Windows phone from their current value, which is less than $10 to a value that is greater than $40. As far as long run target is concerned, Microsoft is aiming to achieve a smartphones market share of 15% by end of 2018. This would fetch them an operating margin of 10% and the company will then generate an annual income of nearly $4.5 billion (Blandford, 2013; Vincent, 2013). Reference List Akbulut, M. E. and Matsusaka, J. G. (2003), ‘Fifty years of Diversification announcements. [pdf] Available at: [Accessed 29 January 2014]. Ando, R. and Rigby, B., 2013. Microsoft swallows Nokias phone business for $7.2 billion. [online] Available at: Belcher, T., and Nail, L. 2000. Integration problems and turnaround strategies in a cross-border merger: A clinical examination of the Pharmacia-Upjohn merger. International Review of Financial Analysis, 9, 219-234. Belso-Martinez, J. A., Molina-Morales, F. X. and Mas-Verdu, F., 2013. Combining effects of internal resources, entrepreneur characteristics and KIS on new firms. Journal of Business Research, 66, pp. 2079-2089. Blandford, R., 2013. Why did Microsoft acquire Nokias Devices & Services business? [online] Available at: [Accessed 29 January 2014]. Brickleya, J. A., Linck, J. S. and Smitha, C. W., 2012. Vertical integration to avoid contracting with potential competitors: Evidence from bankers’ banks. Journal of Financial Economics, 105, 113-130. Campa, J. M. and Hernando, I., 2006. M&As performance in the European financial industry. Journal of Banking and Finance, 30(12), pp. 3367-3392. Dutordoir, M., Roosenboomb, P. and Vasconcelos, M., 2014. Synergy disclosures in mergers and acquisitions. International Review of Financial Analysis, 31, 88-100. Epstein, M. J., 2004. The determinants and evaluation of merger success. Business Horizons, 48(1), pp. 37-46 Eun, C, S., Kolodny, R. and Scheraga, C., 1996. Cross-border acquisitions and shareholder wealth: Tests of the synergy and internalization hypotheses. Journal of Banking and Finance, 20(9), pp. 1559-1582. Fernandes, R., Gouveia, B. and Pinho, C., 2012. Vertical integration moment in dynamic markets. Strategic Outsourcing: An International Journal, 5(2), pp. 121-144. Fuller, K., Netter, J. and Stegemoller, M., 2002. What do returns to acquiring firms tell us? Evidence from firms that makes many acquisitions. The Journal of Finance, 57(4), pp. 1763-1793. Konstantopoulos, N., Sakas, D. P. and Triantafyllopoulos, Y., 2007. The dimension of communication in the merger: Simulation with dynamic model. AIP Conference Proceedings, 963(2), pp. 1062-1065. Lai, C., Chine, C. and Chang, S., 2010. Vertical separation versus vertical integration in a macroeconomic model with imperfect competition. International Review of Economics and Finance, 19, pp. 590-602. Lee, T. B., 2013. Here’s why Microsoft is buying Nokia’s phone business. [online] Available at: [Accessed 29 January 2014]. Liao, A. and Williams, J., 2008. Do Win-Win Outcomes Exist? A Study of Cross-Border M&A Transactions in Emerging Markets. Comparative Economic Studies, 50, pp. 274-296. Martynova, M. and Renneboog, L., 2008. A century of corporate takeovers: What have we learned and where do we stand? Journal of Banking and Finance, 32(10), pp. 2148-2177. Microsoft, 2011. Nokia and Microsoft announce plans for a broad strategic partnership to build a new global mobile ecosystem. [online] Available at: [Accessed 29 January 2014]. Microsoft, 2013. Accelerating Growth. [pdf] Available at: [Accessed 29 January 2014]. Mitra, A., 2013. Undercurrent: Microsoft-Nokia – Mixing two 90′s biz models is not recipe for future. [online] Available at: [Accessed 28 January 2014]. Moeller, S.B., Schlingemann, F. P. and Stulz, R. M., 2003. Do shareholders of the acquiring firms gain from acquisition? [pdf] NBER Available at: http://www.nber.org/papers/w9523.pdf?new window=1 [Accessed 29 January 2014] Nikolaosa, K. and Yiannis, T., 2013. The Leaderships information system of new performance management practices after Mergers & Acquisitions. Procedia - Social and Behavioral Sciences 73, pp. 634-642. Nokia Corporation, 2013. Microsoft to acquire Nokias Devices & Services business, license Nokias patents and mapping services. [online] Available at: [Accessed 29 January 2014]. Pedro, C. and Marques, R. C. 2014. Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods. European Journal of Operational Research, 234, pp. 292-307. Que, L. D. and Zhou, W., 2007. Merger Waves: A model of endogenous mergers. The RAND Journal of Economics, 38(1), pp. 214-226. Quinn, J. B. and Hilmer, F. G. 1994. Strategic outsourcing. Sloan Management Review, Vol. 35(4), pp. 43-55. Rocha, F. and Kupfer, D., 2002. Structural changes and specialization in Brazilian industry: The evolution of leading companies and the M&A process. The Developing Economies, 40(4), pp. 497-521, Rowinski, D., 2013. With Nokia, Microsoft has no more excuses. [online] Available at: [Accessed 29 January 2014]. Segundo, E., 2013. Microsoft to Become One of World’s Leading Chip Buyers on Nokia Acquisition. [online] Available at: [Accessed 29 January 2014]. Servaes, H., 1991. Tobin’s Q and the gains from takeovers. The Journal of finance, 66(1), pp. 409-419 Smith, M., 2013a. Microsoft explains why its buying Nokia, says it needs a first-rate smartphone experience. [online] Available at: [Accessed 29 January 2014]. Smith, M., 2013b. Microsoft to acquire Nokias devices & services business for around $5 billion. [online] Available at: [Accessed 29 January 2014]. Stewart, J., 2013. Sources: M&A talk in Chile salmon missing the point. [online] Available at: [Accessed 29 January 2014]. Sudarsanam, S. and Mahate, A. A., 2003. Glamour Acquirers, Method of Payment and Post‐acquisition Performance: The UK Evidence. Journal of Business Finance and Accounting, 30 (1), pp. 299-341. Talbot, D., 2013. How Microsoft might benefit from the Nokia deal. [online] Available at: The guardian, 2014. Microsoft & Nokia: the promise that few focus on. [online] Available at: [Accessed 29 January 2014]. Triantafyllopoulos, Y., Konstantopoulos, N. and Sakas, D. P., 2012. The performance management after mergers and acquisitions in high technology manufacturing business. Key Engineering Materials, 495, pp. 171-175. Vincent, J., 2013. Four reasons why Microsoft had to buy Nokia. [online] Available at: [Accessed 29 January 2014]. Warf, B., 2003. Mergers and acquisitions in the telecommunication industry. Growth and Change, 34(3), pp. 321 – 344 Yoo, K., Lee, Y. and Heo, E., 2013. Economic effects by merger and acquisition types in the renewable energy sector: An event study approach. Renewable and Sustainable Energy Reviews, 26, pp. 694-701. Read More