UPDATE: Jeremy Davies, CEO of retail market tracker Context, says the move will allow Microsoft to better compete with Google and Apple.
Microsoft will purchase Nokia’s Devices & Services business, licence its patents and use its mapping services in a €5.44 billion (£4.61 billion) deal.
The tech giant will pay €3.79 billion (£3.21 billion) for Nokia’s mobile phone arm, which produces more than 200 million Nokia phones a year, including the Windows Phone.
For Nokia’s patents, Microsoft will pay another €1.65 billion (£1.40 billion). Nokia’s mapping services have also been acquired, for which Microsoft will pay a yearly fee. Microsoft is also acqiring Nokia's Smart Devices business unit, including the Lumia brand and products.
Microsoft and Nokia first began a partnership to produce the Windows Phone together in 2011. Microsoft states that its partnership with Nokia will "accelerate growth". The Windows Phone is currently outselling Blackberry in 34 markets, with almost 80 per cent year-on-year growth.
Nokia is assigning to Microsoft its long-term patent licensing agreement with Qualcomm, while Microsoft will acquire the Asha brand and will licence the Nokia brand for mobile phones. Nokia will continue to own and manage the Nokia brand.
Microsoft will become a strategic licensee of the HERE platform, and will separately pay Nokia for a four-year license.
Microsoft also announced that it has selected Finland as the home for a new data centre that will serve Microsoft consumers in Europe. It will invest more than $250 million in this over the next few years.
The operations moving to Microsoft made around €14.9 billion during 2012 - almost half of Nokia's net sales.
Nokia expects Stephen Elop, Jo Harlow, Juha Putkiranta, Timo Toikkanen and Chris Weber will transfer to Microsoft in early 2014. Around 32,000 people are expected to transfer to Microsoft in total.
“It’s a win-win for employees, shareholders and consumers of both companies,” said Steve Ballmer, Microsoft’s CEO. “Bringing these great teams together will accelerate Microsoft’s share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services.
“Nokia brings proven capability and talent in critical areas such as hardware design and engineering, supply chain and manufacturing management, and hardware sales, marketing and distribution.
“We expect this acquisition to be accretive to our adjusted earnings per share starting in FY15, and we see significant long-term revenue and profit opportunities for our shareholders.”
Stephen Elop, who has become Nokia’s Executive Vice President of Devices & Services as part of the deal, added: “Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing and manufacturing."
The deal is expected to close in the first quarter of 2014.
Jeremy Davies, CEO and co-founder of Context, told PCR: "There are some that say Stephen Elop was on a secret mission ever since he joined Microsoft to get this to happen – of course that's gossip but the move can be seen as inevitable.
"This purchase by Microsoft is a game changer and it now puts the once software-only company firmly in the hardware business, a place it has to be in to compete with Apple and Google, and most importantly to be able to leverage the huge Windows asset across a variety of platforms while reducing dependence on PCs."