Merger And Acquisitions: Case Of Microsoft
Acquisition In Nokia
Question:
Discuss about the Merger and Acquisitions for Case of Microsoft Acquisition in Nokia.
Answer:
Introduction
In the present business scenario, the strategy of unit and rule is more followed
than divide and rule. Today, the companies are coming together to join hands so
that the resources could be utilized to the optimum level (Anderson, Havila, and
Nilsson, 2012). In a merger and acquisition deal, two or more companies are
consolidated to bring into existence a single entity. Merger and acquisition
strategy can be quite handy for the companies operating in the same industry to
get competitive advantages. In the recent years, the merger and acquisitions
have increased rapidly, which is evident from the fact that in the year 2015 total
merger and acquisition deals announced worldwide were $4.4 trillion. This was
straightaway 42% higher than 2014 (Lam, 2016).
In the context developed above, the discussion in this paper has been extended
to the analysis of the effects of merger of Microsoft with Nokia. Microsoft
announced acquisition of Nokia’s assets in the year 2013 for $7.90 billion. This
paper addresses the synergy gains or losses and other effects of the merger on
Microsoft.
Synergies Arising From The Merger
It is often seen in the merger and acquisitions deals that the buyer pays premium
or extra charge over and above the value of net assets acquired in a merger
deal. This premium or extra charge is paid for synergy gains that the buyer
expects to reap out from that merger deal (Karenfort, 2011). Thus, synergy can
be inferred to be the additional value created as a result of combining the
operations of the two companies together. The synergy created by the merger
could be financial and/or operating (Gaughan, 2013). The financial synergy is
manifested in the increased debt capacity, improvement in the liquidity, tax
benefits, and improved overall financial performance of the resulting company
after merger. On the other hand, operating synergy is manifested in the
economies of scale, reduced competition, and enhanced goodwill in the market
(Gaughan, 2013).
In the current case of Microsoft and Nokia merger, the evaluation of synergy has
been made by analyzing the financial performance of the Microsoft pre and post
merger. The facts and figures for pre acquisition period that relate to the period
before the year 2014 have been analyzed as below:
Table 1: Financial Performance of Microsoft before Merger
$ Million
2010 2011 2012 2013 Average
Revenues 62,484.00 69,943.00 73,723.00 77,849.00 70,999.75
Cost of operations 12,395.00 15,577.00 17,530.00 20,249.00 16,437.75
Gross margin 50,089.00 54,366.00 56,193.00 57,600.00 54,562.00
Gross margin ratio 80.16% 77.73% 76.22% 73.99% 77.03%
Net margin 18,760.00 28,071.00 22,267.00 21,863.00 22,740.25
Net margin ratio 30.02% 40.13% 30.20% 28.08% 32.11%
EPS 2.13 2.73 2.02 2.61 2.37
(Microsoft, 2016)
Table 2: Financial Performance of Microsoft after Merger
$ Million
2014 2015 Average
Revenues 86,833.00 93,580.00 90,206.50
Cost of operations 27,078.00 33,038.00 30,058.00
Gross margin 59,755.00 60,542.00 60,148.50
Gross margin ratio 68.82% 64.70% 66.76%
Net margin 22,074.00 12,193.00 17,133.50
Net margin ratio 25.42% 13.03% 19.23%
EPS 2.66 1.49 2.08
(Microsoft, 2016)
From the data presented in the table-1, it could be observed that the company
was maintaining an average gross profit ratio of 77.03%. The revenues of the
company were growing at a study pace. The average revenues earned by the
company in the period of four years from 2010 to 2013 amounted to $70,999.50
million (Table-1). Further, the company was making healthy profit margins at a
percentage of 32.11%. However, immediately after the acquisition of the Nokia’s
assets, there was observed a downfall in the company’s profitability. The gross
profit margin reduced from 73.99% in the year 2013 to 68.82% in the year 2014
and it further went down in the year 2015 to 64.70%.
It may be noted that the company was able to increase its sales after acquiring
the assets from Nokia in the year 2013. The sales revenues increased from
$77,849 million in the year 2013 to $93,580 million in the year 2015. Though, the
company achieved growth in the revenues, but the gross margins went down,
which indicates increase in the cost of operations. The increase in the cost of
operations is a clear indication that the company did not receive economies of
scale from the acquisition of Nokia’s assets. Thus, there was no operational
and/or financial synergy for Microsoft from the acquisition of the assets from
Nokia.
The company’s profitability was affected adversely from this merger deal, which
is evident from the deterioration in the net margin. As against the average net
profit margin of 32.11% in the four years preceding the acquisition, the company
could maintain only 19.23% net margin in the two years after the acquisition.
Further, the ESP of the company was down to $1.49 in the year 2015 from as
high as $2.61 in the year 2013. Considering the bad financial performance in the
post acquisition period, the company admitted that the merger deal with Nokia
was the biggest failure (Keizer, 2015).
Test Of Merger Theory
The merger theory believes that the aggregate value of two separate firms is
always lower than the combined value when those two firms are merged. This
implies that the aggregate market capitalization value of Microsoft and Nokia
would be lower than the market capitalization value of Microsoft after merger with
Nokia. The theory of merger is based on the premise that the two firms operating
separately would not be able earn equal to the earrings of the firm created by
merging those two firms. The theory states that this enhanced value is created as
a result of synergy emerging from the merged operations. However, not all the
merger and acquisitions deals gets succeed.
In the case of Microsoft acquiring assets of Nokia, the test of this theory of
merger is being carried out as under:
Table 3: Evaluation of the Merger Impact
After Merger
Before Merger (2013) Impact
(2014)
Nokia
Microsoft Total
assets
Monthly average
price (Yahoo -
26.77 36.60
Finance, 2016)
No of shares -
8,375.00 8,299.00
Market
Capitalization 224,198.75 *9,442.00 233,640.75 303,743.40 70,102.65
*Note: In computing market value before merger for Nokia, the assets that are
under acquisition have been considered. Therefore, the market value of Nokia
has been taken as the market value of its assets under acquisition that is $9,442
million (Microsoft, 2015).
From the above figures, it could be observed that the market value of Microsoft
increased by $70,102.65 immediately after the acquisition of the Nokia’s assets.
However, this acquisition was a failure for the company, but still the market value
increased substantially after the finalization of the acquisition deal. From this
situation, it could be inferred that this was a short term speculative effect on the
stock’s price of the company which laid increase in the market capitalization in
the year 2014 as compared to the year 2013.
Evaluation Of Failure Of Merger
The results of merger and acquisition could be negative if the process of merger
and acquisitions is not handled strategically. In the absence of strategic approach
towards merger and acquisitions, the companies have been seen facing
complete failure. As per the study conducted by Coopers and Lybrand, there are
five major factors that affect the success and failure of the merger and
acquisitions (Milnerltd.com, 2014). These five factors are detailed post
acquisition integration plans, clarity of acquisition purpose, good culture fit, high
degree of target management, and knowledge of target and its industry. Among
these five factors, Coopers and Lybrand regarded the post acquisition integration
plan as the most crucial (Milnerltd.com, 2014).
In the current case being analyzed in this paper, Microsoft had failed sustaining
the acquisition of Nokia’s assets in the merger deal. The company could not
capitalize on this merger deal due to absence of clarity in the objectives of
acquisition and post acquisition integration plan. Though this merger deal the
company tried to enter into the new market leaving its core field operations
unfocused. Further, post revelations of the failure of merger, it was observed that
lack in clarity of acquisition purposes and adequate planning for integration were
also the reasons for failure of the merger (Milnerltd.com, 2014).
The merger and acquisition decisions are very sensitive to the market; therefore,
the management should be cautious in drawing out such decisions
(Milnerltd.com, 2014). Preparing a detailed merger plan including analysis of the
future trend is a prerequisite to go for merger and acquisition deal. In the current
case, Microsoft could not analyze the future trend of mobile industry
appropriately, which caused failure of the company’s merger with Nokia. The
financial performance started affecting adversely as soon as the company
acquired assets from Nokia. The acquisition was made in the last quarter of the
financial year 2013 and in the year 2015, the company wrote off $7.10 billion as
the cost of merger (Keizer, 2015).
Conclusion
The discussion in this paper revolves around the issues governing the merger
and acquisitions in the corporate world. The main focus area of this paper is to
highlight the synergy in the context of merger and understand the factors the
cause failure of the merger and acquisition deals. For this purpose, the case of
Microsoft and Nokia merger has been analyzed in this paper. Microsoft acquired
assets of phone division of Nokia for an amount of $7.10 billion in the year 2013.
Though, the company was expecting to benefit at the big scale from this deal, but
it could not sustain it for a longer period. Finally, in the year 2015, the company
announced admitting the fact that it failed in the merger with Nokia.
References
Anderson, H., Havila, V., and Nilsson, F. 2012. Mergers and Acquisitions: The
Critical Role of Stakeholders. Routledge.
Gaughan, P.A. 2013. Maximizing Corporate Value through Mergers and
Acquisitions: A Strategic Growth Guide. John Wiley & Sons.
Karenfort, S. 2011. Synergy in Mergers & Acquisitions: The Role of Business
Relatedness. BoD – Books on Demand.
Keizer, G. 2015. Microsoft writes off $7.6B, admits failure of Nokia acquisition.
[Online]. Available at:
https://www.computerworld.com/article/2945371/smartphones/microsoft-writes-
off-76b-admits-failure-of-nokia-acquisition.html [Accessed on: 05 December
2016].
Lam, B. 2016. 2015: A Merger Bonanza. [Online]. Available at:
https://www.theatlantic.com/business/archive/2016/01/2015-mergers-
acquisitions/423096/ [Accessed on: 05 December 2016].
Microsoft. 2015. Annual report of Microsoft for 2015. [Online]. Available at:
https://www.microsoft.com/investor/reports/ar15/download-center/index.html
[Accessed on: 05 December 2016].
Microsoft. 2016. Investor Relations Annual Reports. [Online]. Available at:
https://www.microsoft.com/en-us/Investor/annual-reports.aspx [Accessed on: 05
December 2016].
Milnerltd.com. 2014. 10 steps to Success in Merger and Acquisitions. [Online].
Available at: https://www.milnerltd.com/wp-content/uploads/2014/02/10-Steps-to-
Success-in-Mergers-Acquisitions.pdf [Accessed on: 05 December 2016].
Yahoo Finance. 2016. Microsoft Corporation (MSFT): Historical Prices. [Online].
Available at:
https://in.finance.yahoo.com/q/hp?s=MSFT&a=06&b=01&c=2012&d=07&e=31&f
=2014&g=m [Accessed on: 05 December 2016].
