Monday, July 13, 2015

Microsoft’s Nokia Adventure: Ballmer’s Parting “Gift”

Microsoft (MS) announced a $ 7.6B write-off of it disastrous September, 2013 acquisition of Nokia. MS shares were unchanged in a day in which the market faced a large sell-off. The write-off came as no real surprise as the deal was highly suspect from its inception. MS’s shares fell 6% when the deal was originally announced representing an over $15B market capitalization loss. The market was reacting not only to the deal itself, but also the strategic implications of the deal; namely MS’s deepening commitment to the highly competitive devices market and away from its core software business.
Two other strange facts surround the deal. First MS’s CEO, Steve Ballmer had recently announced his planned retirement. The market reacted with a 7%+ jump in MS’s stock on the announcement-not exactly a sterling endorsement of Ballmer’s performance. See Vanity Fair’s article for background on Ballmer’s management history. Next, it was uniting former MS employee Stephen Elop, Nokia’s CEO, with MS. Elop’s performance was equally uninspiring at Nokia as it was facing a rumored bankruptcy after losing billions. I guess you can call it a buddy deal involving the two Steves.

What is surprising is that such a deal championed by an out-going CEO with a checkered record could be approved given widespread apprehension within MS, including from its future CEO Satya Nadella. It essentially is a doubling down on Ballmer’s failed strategy to embed MS’s Windows software in smart phones where it had only a 3% share. MS was going up against Google’s Android and Apple’s IOS and expected to triple its share in 3 years. How it was going to do so with money losing Nokia against well entrenched competitors is the stuff of dreams-or is it nightmares?

I guess we should not be too surprised Nokia was approved given MS’s patchy acquisition record. Remember the $6.2B charge for aQuantive. Also there Ballmer’s $47B abortive Yahoo acquisition where he was saved by Yahoo Jerry Yang’s even bigger ego. MS was suffering from poor board oversight and bad governance. This seems to be endemic to many aging tech firms who use acquisitions in the elusive search for the fountain of youth to regain their mojo.

Ballmer’s Nokia adventure left his successor with both a strategic dilemma and a hemorrhaging acquisition. Their new CEO is addressing these “gifts”. Let’s hope he elects to let MS age gracefully by managing Windows structural decline with increased shareholder distributions instead of engaging in expensive adventures.


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