There are supposed to be five golden rules for a successful acquisition ‘ pick the right team; have a clear end game in mind; ensure there is a good fit; get the timing right; and of course, agree a good price. The end of the summer was marked by a torrent of M&A deals. More start-ups being snapped up by Apple (AlgoTrim for data compression, Embark for mapping); deals in hot growth areas like location data (Amdocs buying Actix) or the internet of things (ARM taking Sensinode); and of course two megadeals, announced within 24 hours of one another ‘ Verizon/Vodafone and Microsoft/Nokia.
Both had been rumored frequently over the past couple of years, though in the latter case, the actual announcement still came as a surprise. Both may appear to have little immediate effect on the status quo, since in each case, the companies are already close partners and full ownership will not necessarily change strategy fundamentally. But both will have profound ripple effects on their sectors, prompting response from rivals and, potentially, a further round of acquisitions.
On an overall scorecard, we would say Verizon’s $130bn buy-out of Vodafone’s 45% stake in Verizon Wireless is excellent for the US firm (an A- grade perhaps), but in Vodafone’s case, despite the high price, the verdict will depend how it spends its windfall ‘ and the early signs look worryingly conservative (so give it a B+, not forgetting just how much money it has managed to take out of its venture).
For Verizon Wireless itself, though, the deal ticks most of the five boxes. The venture has recently stabilized a strong management team with considerable autonomy as it has gained more and more sway over Verizon’s entire strategy; there is certainly a clear end goal, of dominating the US mobile broadband and quad play markets while rivals are distracted with new acquisitions and foreign adventures; the fit is obvious; the timing is fairly good ‘ although Vodafone has waited until it can command a premium price, this will be justified by the likelihood of continued growth and profit at the wireless arm, and an earlier buy-out would have left the JV feeling, more sorely, the loss of Vodafone’s expertise and input.
The scorecard for Microsoft’s $7.2bn acquisition of Nokia’s handset business (plus some of its patents) is far less shiny. For Microsoft it creates far more challenges than it solves, and the chances of it turning the Windows giant into a new Apple, capable of turning Windows Phone’s miserable market share into gold, are minimal. There are jewels within Nokia ‘ the Asha range for emerging markets, complete with the potential to create a new platform for those bases; the sound hardware engineering, especially in areas like imaging. Unfortunately, these are not strengths on which Microsoft is well placed to build, and the fear is that it will squander these advantages while taking on new problems, such as further alienation of other OEM partners and the issues of running an increasingly low margin commodity device business. Of course there are creative things Microsoft could do with its new toy ‘ building a broad range around the Xbox brand and experience, putting a significant push behind the Asha software platform. New management next year may indeed bring some new ideas and impetus to the mobile business.
But on current track record, the acquisition is unnecessary and challenging (a poor D+), ticking none of the five boxes except the cheap price. The management team is unfocused ‘ Stephen Elop, who will return to his former mother ship to run the devices business, and is now tipped to be the next Microsoft CEO, has turned in lackluster turnaround performance at best at Nokia; Microsoft’s own mobile team has been reshuffled and broken up several times and several key figures have left. The end game may be superficially clear ‘ making Windows Phone and Windows RT into leading platforms for the post-PC world and so offsetting the loss of the Wintel market ‘ but there is utter confusion about the steps to get to it. The fit between a software and cloud giant, and a firm whose expertise lies in increasingly low margin gadgets, is virtually non-existent, and the alliance over the WP platform was there already, without the need for takeover. That means the timing was never going to be right ‘ but is particularly bad at a time when the potential to squeeze profit and growth out of handsets is far lower even than 2.5 years ago, when the original Microsoft/Nokia pact was announced.
For Nokia, the deal seems somewhat better, though the sadly low price ‘ only .33 times annual revenues ‘ smacks of a firm which has despaired of rejuvenating its core business (in 2011, there was talk of its handset unit being worth $30bn). But the company gets a B- for unsentimentally accepting that, and ditching its most famous activity just when its other, smaller concerns are on the uptick. NSN, free of the Siemens partnership, is showing real signs of revival and sustainable profit; the Here location business is a real jewel and one of the rare areas where Nokia has added significant creative thinking and value to a platform.
For all its faults and grave mistakes, this is why Nokia emerges better from this week than Microsoft. It has been able to shed a business which has delivered it so much fame, profit and power over the past few decades, and could emerge as a smaller, reinvented but robust company again. Microsoft, for all its successes in new areas like Azure and Xbox, has been increasingly hampered by its obsessive clinging to the Windows platform that made it great. Buying Nokia to prop up Windows Phone is just another example of a strategy which looks to the past not the future.