Unexpected Finnish

Nokia smartly leaves phone fightback to Microsoft

Nokia is smartly leaving the phone fightback to Microsoft. The handset pioneer, besieged by iPhones and Samsung Galaxies, has agreed to sell its signature business to its US partner. The surprise ^5.44 billion ($7.2 billion) deal means Nokia cedes upside in any recovery in exchange for a good slug of cash. Microsoft is far stronger financially - its offshore cash pile is $70 billion - but it may still struggle to win in smartphones.

Deal rumours have swirled since Chief Executive Stephen Elop joined Nokia from Microsoft in late 2010 and quickly staked its future on smartphones using the US software giant's Windows operating system. Yet Microsoft seemed to have all it wanted from the partnership, and little need to own a cash-draining hardware business. The conventional wisdom proved wrong. Nokia recently bought out infrastructure unit NSN from partner Siemens cheaply. That made an alternative future as an Ericsson-style equipment provider more plausible. Meanwhile, Microsoft's foray into tablets showed an interest in mobile hardware after all.

The total splits into ^3.79 billion for phones and ^1.65 billion for patent licences. That equates to just 0.3 times sales for the phones unit, Liberum Capital reckons, against the broker's own 0.2 times valuation. Still, other analysts ascribed the unit negative value, fearing it would bleed cash for years before folding. Hence the market reaction on September 3: Nokia shares leapt 38 per cent by mid-morning, adding ^4.2 billion in market value. The stock was a popular short position for hedge funds. They must be reeling.

If the purchase lives up to Microsoft's hopes, phone companies will welcome the weakening of Apple and Samsung's near-duopoly. And Nokia could look foolish. These are big "ifs". Microsoft sketches a future where it sells 15 per cent of all smartphones by 2018. Yet Windows' current market share is 3.3 per cent, according to Gartner, a technology research house; competition is fierce; and ailing handset-makers rarely stage successful comebacks. It's the end of an era in Finland. But Nokia's decision makes sense - and it has extricated itself sensitively from a business of great importance to its native land.