Microsoft announced yesterday that will acquire Nokia’s device and services business for around $7 billion. It is hard to recall when an acquisition was driven by a combination of strategy, management talent and tax law. It is also hard to express how a big a shift this indicates in tech sector business strategy.
Mobile Device Strategy – stack ownership
Apple started all of this. It has long believed that owning the entire stack of hardware and software assets was critical market success because it is essential to ensure a great consumer experience and strategic alignment. For a long time, no one else agreed with this strategy. But thinking began to shift with onset of the mobile era and Apple’s early dominance.
The quintessential software-only business Google bought Motorola. Microsoft then introduced the Surface Tablet that it designed and had built. While the Surface has struggled to break into a competitive tablet market, it still left Microsoft with a gaping hole in the full mobile stack strategy: smartphones. At the same time, Nokia was well behind the competitive curve is providing its own tablet devices, but had smartphones. If you buy into the full stack ownership as competitive advantage thesis, this marriage makes sense.
Acquihire Goes Big-Time
Acquisitions for the sake of hiring management and product development talent has been a notable trend in the tech sector for some time. Acquihires, as they are called, are more interested in the team than any underlying assets owned by the company. While Nokia’s device manufacturing capabilities and patent portfolio clearly make this more than an acquihire, the team coming with the acquisition seems unprecedented.
When was the last time you saw 50% of a public company acquired and the CEO, CFO and two other top executives go with the transaction? Normally, the CEO does the deal, takes the big cash hoard and focuses on what’s left of the business. He remains a public company CEO and not a division president. Of course, this is not ordinary transaction. Nokia CEO Stephen Elop formerly worked at Microsoft where current CEO Steve Ballmer has indicated he will retire within the year.
Since Microsoft has just taken on a big manufacturing business and smartphones are central to its long-term strategy, there is no doubt that Ballmer’s replacement will need to have experience overseeing manufacturing as well as software. Elop has done both. The bench at Microsoft is not very deep in that regard. It would seem that Elop is part of the deal so he can follow Ballmer as the third CEO of Microsoft. Given this expectation, Mr. Elop’s senior team related to mobile is also joining him in the exodus.
Tax Law Made this Easier
Microsoft has a lot of cash. However, $60 billion of it is trapped overseas due to U.S. tax law. The United States is among a small minority of countries that taxes profits again that were already taxed in the country where they were earned. This only occurs when cash is repatriated into the United States. Cisco and Microsoft have tremendous overseas cash holdings that have already been taxed by foreign governments. If they are brought back to reinvest in U.S. operations they will be taxed another 35% by the IRS. Most CEOs and CFOs won’t allow that to happen.
As we have seen Cisco focusing its foreign held cash on foreign acquisition to avoid repatriation taxes, Microsoft’s Nokia acquisition follows a similar pattern. If Nokia were a U.S. based company, it could have cost Microsoft 35% more just due to taxation. Even better, Quartz is reporting that Finland plans to reduce its corporate tax rate from 24.5% to 20%, far less than the U.S. would tax those manufacturing operations.
A Perfect Storm
You might say the Nokia acquisition is a perfect storm. You had three forces playing in concert: full stack ownership strategy, the need for management talent and tax policy. You also had two former titans of technology struggling with the shift brought on by the mobile era. As Roy Scheider famously said in the movie Jaws, “we’re gonna need a bigger boat.” Maybe the combined Microsoft / Nokia boat will help both companies weather the mobile storm and find growth again.
- Pancakes: Geekwire
- Elop: Technobuffalo
- Taxes: Under30CEO