Multinational Acquisition - Microsoft Acquired Nokia - Essay Example

Multinational Acquisition (Microsoft Acquired Nokia) Introduction Acquisition is identified to be a strategic approach, which mainly adopt by different multinational organisations to expand and develop their respective businesses in every region throughout the globe. This concept is duly considered to be a positive integration of the organisations towards enhancing their respective corporate growth. The strategic policy of acquisition often takes place between two companies that are mutually agreed to the terms and conditions specified. It will be vital to mention that the acquisition strategy often takes place in terms of cash or by taking over the shares (2Ernest & Young, 1994). With this concern, the essay intends to elaborate the acquisition strategy of Microsoft Corporation over Nokia Oyj. Microsoft recently underwent strategic acquisition of different brands of Nokia. The company opt for patent acquisition specifically of certain mobile phones that were traded by Nokia previously. Microsoft acquired patents of around 8500 designs that were previously traded by Nokia. However, Microsoft did not opt for replacing the existing brand name that Nokia is using for branding its products (Singh, 2014). Thus, the essay will analyse the different acquisition techniques followed by the organisation i.e. Microsoft when acquiring Nokia. Discussion Type of Acquisition The type of acquisition, which Microsoft underwent, is patent acquisition. In order to describe the acquisition, it can be inferred that the company acquired nearly 8500 patents of designing certain brands of Nokia. Patent is duly considered to be an intellectual property for the companies. The acquisition of the patent rights eventually provided Microsoft with an added advantage to develop an authority to deal with certain authorities. It is worth mentioning that with the recent development of different phones that designed by Apple and Samsung, the well-developed market of Nokia fell drastically. Furthermore, as the Android technology based smart phones took over the market and developed its leadership over Windows software, Microsoft even faced a massive downturn. The giants of their respective areas of operations faced severe backlogs and developed a huge turmoil during this convergence of the market. Thus, Microsoft went with strategic development of acquiring the 8500 design patents of Nokia specifically in the field of smart phones (Ali-Yrkko et al., 2013). The acquisition that took place between the two companies was mostly based on the intellectual properties, which are owned by Nokia. Microsoft eventually acquired the business units that dealt with smart phones and tablets. A transfer of around 32000 employees from Nokia to Microsoft took place as a strategic implementation of this acquisition. The deal was observed to be involved with a transaction of € 5.44 billion. After the completion of the acquisition, Nokia will only have the right over its NSN and digital services brand. Furthermore, the company would also be enjoying patent rights over the portfolios of its 2G and 3G telecommunication services. Additionally, the company i.e. Nokia will also be having its intellectual property right over Nokia Research Centre. However, the above stated acquisition was one of the boldest moves of Microsoft until date and is noted to be a huge leap of the company in the developing market of smart phones and tablets (Ali-Yrkko & et al., 2013). Accounting Requirements and Challenges The business transaction, which took place between Microsoft and Nokia in the form of acquisition, was mainly purchasing the intellectual assets. The accounting requirements that are involved with this particular acquisition are observed to be quite crucial for reaching into a proper and valid conclusion. In this regard, the accounting requirements involve proper valuation of the prices and the exact amounts based on which the companies are acquired. Notably, Nokia was taken over at 5.44 billion Euros by Microsoft with an additional payment of 1.65 billion Euros to use the company’s licence and extend the same indefinitely for the next 10 years (Ali-Yrkko & et al., 2013). The accounting requirements of measuring the intangible assets are often found to be quite complex and thus requires rigorous perception of the future aspects. Since the intangible assets are not measurable in terms of money, accounting for the same is often found to be quite complex. The determination of a fair value for intangible assets is also quite complex, as the probabilistic evaluation of the intangible assets is unpredictable. Hence, the intangible assets are best valued at their quoted market price (1European Commission, 2010). One of the challenges faced by Microsoft was the valuation of its intellectual assets, based on their future projected value. The other challenge faced by the company was developing a proper plan for taking over the assets of Nokia, as the company was facing a steep fall in the market and its projected values of goodwill was not completely determined. Microsoft even faced a huge downturn in the market in its software sector and the stakeholders attached with the company also faced problems in aligning with the new expansion plan that the company desired to undergo. Furthermore, brand acquisition of the former giant i.e. Nokia in the sector of mobile phones was also quite conspicuous. The complete takeover of the brand projected a chance of walk out of its brand loyal consumers. This even prevented Microsoft from deciding the extent of takeover of the complete brand. Combination of the two businesses is likely to project huge prospect of future sales and develop a unique combination of brand name and product quality. The business consolidation, which involved changes, was observed to impose huge impact on value of services. Microsoft has taken over the company at the time when Nokia was at the verge of its bankruptcy, despite regaining its market share for different brands that they were previously trading. These trends suggested that Microsoft was effective in planning the merger after projecting huge future growth (2European Commission, 2011). Valuation for Intangible Assets The probabilistic valuation of goodwill and other intangible assets makes it quite complex for the companies to decide the exact value that they are likely to pay for acquisition. The valuation of goodwill is computed based on the present value that the companies have been earning for its shares. Hence, valuation of the intangible assets is often observed to be a multifarious concept for the financial planners. The values that Microsoft provided Nokia for its acquisition of assets were based on the present situation that the company was undergoing. Nokia was facing huge financial meltdown and severe challenges for financing their developmental projects. This even led to the erosion of its share value and moved the company to the verge of bankruptcy. Thus, this situation created an opportunity for Microsoft to enhance its market share and develop market opportunity. The value, which had been decided, was quite justified, as the acquired company i.e. Nokia was undergoing through financial turmoil. This even projected huge chances that the share prices may either develop or fall down further post acquisition. Hence, the valuation of the patents that Microsoft paid to Nokia was justified. With the outstanding debt, being more than the equity value, Nokia was actually facing a massive financial backlog when Microsoft planned the takeover. Hence, the valuation of goodwill and other intangible assets were just and were done adequately (Ali-Yrkko & et al., 2013; 1European Commission, 2010). Special Issues Resulting from Acquisition The challenges faced by the acquiring company i.e. Microsoft during post acquisition are observed to be imposing huge impact on its overall growth along with development. It is worth mentioning that the changes in ownership have a huge impact on the development of the new business of the company, which is being acquired. Justifiably, the consolidation of business is even going to have an effect on the development of the different new methods that are being incorporated within the system. The change in the ownership imposed by Microsoft was in terms of employee shifting and acquiring patent rights. This mode of acquisition has a huge impact on the development of the designs of Nokia, which may have an impact on future business trends. The impacts concerning changes in ownership may likely to create lack of proper anticipation of future development and improper management of the existing market (Hanson & Falck, 2011). Furthermore, the acquisition may even affect the different strategic development that has been previously incorporated and is likely to bring huge change in the organisational structure. There also exist chances that the loyal consumers may face dissatisfaction with the changed product and lead to rundown of the consumers. This wash away of the existing level of consumers can even lead to a massive fall of the brand image and can even create a fall in the share price. This can affect the anticipation of the company pre acquisition and further affect strategic development procedure (Ali-Yrkko & et al., 2013). The merger of the existing entities may not be fruitful to be counted as a positive outcome of acquisition. The change in ownership may even create a hindrance amongst the employees to perform better and even create a huge impact on the development of the company. This can further lead towards downturn of the new formed business and develop a negative image in the market. Furthermore, the transfer of employees may even create a psychological imbalance of their cognitive skills and create a blockage. This may prevent them from aligning their respective individual goals with that of the organisational objectives and further hinder their performances. Since, there were no massive transaction of assets, the chances of insolvency and liquidation could be nullified. The acquiring company was mainly involved in taking up the design patents and desired to develop its future prospects. Correspondingly, Microsoft is planning to penetrate into a new booming market parallel to its existing product line, which eventually made the chances of being insolvency nullified by a greater level (Ali-Yrkko & et al., 2013). Key Areas of Difference between IFRS and US GAAP The change in reporting, which is likely to occur, if the company is considering IFRS in place of US GAAP, owing to the differences prevailing in the computation systems. Since, Microsoft has presently undergone through valuation of assets under the US GAAP, the intangible assets were valued on their face value that they are presently having. However, if the IFRS system would have been used, the company might valued the intangible assets based on the economic benefits that they are likely to earn with the future trading of the shares. Thus, there could be either a positive change or a negative change in the value of acquisition. For instance, Microsoft presently acquired the intellectual assets of Nokia based on the fair value that the company holds in the present market. However, there are chances in the following years that the company would regain the value of its assets with the change in the business patterns. Hence, Nokia projects positive economic benefits in the future that are likely to impose an economic benefit for Microsoft. Thus, if the valuation was computed under IFRS, Microsoft would have been paid more at the time of acquisition than it has actually paid for the acquisition under US GAAP (1Ernest & Young, 2012). Conclusion Based on the above analysis and discussion, it can be ascertained that the acquisition of intellectual assets performed by Microsoft over Nokia is a positive move. Microsoft takes a giant leap to take over the market of mobile and telecommunication sector by acquiring 8500 patents of Nokia. This is even noted that at present, Microsoft values its goodwill and other assets at fair value. This can be justified as the computation had been made with using the US GAAP technique of calculation. The different valuation methods of the intellectual assets were conducted at market price and a slight benefit was provided over the fair value of the shares. The acquisition was done in a fair way in terms of valuation of intangible assets. Acquisition of company is a huge challenge, as there exist huge challenges for reorganising the business post acquisition. These challenges broadly involve operations with the existing company and facing convergence of business. With the change in the business, there are chances of conflict at various levels of business operations. The shift of the employees from Nokia to Microsoft may even create a mental stress on them and thus hamper their level of performances. Hence, acquisitions always have a set of challenges that need to be handled properly so that a steady business can be developed post acquisition. References Ali-Yrkko, J., Kalm, M., Pajarinen, M., Rouvinen, P., Seppala, T., & Tahvanainen, A. (2013). Microsoft acquires Nokia: implications for the two companies and Finland. ETLA Muistio, 16, 1-6. 1Ernest & Young. (2012). US GAAP versus IFRS. The Basics, 1-54. 2Ernest & Young. (1994). Mergers and acquisitions. Canada: John Wiley & Sons. 1European Commission. (2010). Intangible assets. International Accounting Standard, 38, 1-27. 2European Commission. (2011). Business combinations. International Financial Reporting Standard, 3, 1-32. Hanson, T., & Falck, K. (2011). The aftermath of acquisitions: challenges after an acquisition. Bachelor Thesis International Business, 1-48. Singh, N. P. (2014). Microsoft acquired Nokia in unipolar operating system market. Independent Journal of Management & Production, 5(3), 598-622. Read More