By Ritsuko Ando and Bill Rigby
HELSINKI/SEATTLE (Reuters) - Two years after hitching its fate to Microsoft's
Nokia, once the world's dominant handset maker, has failed to close a yawning lead opened up by Apple
Nokia's Canadian boss Stephen Elop, who ran Microsoft's business software division before jumping to Nokia in 2010, will return to the U.S. firm as head of its mobile devices business - a Trojan horse, according to disgruntled Finnish media.
He is being discussed as a possible replacement for Microsoft's retiring CEO Steve Ballmer, who is trying to remake the U.S. firm into a gadget and services company like Apple before he departs, though it has fallen short so far in its attempts to compete in mobile devices.
"It's very clear to me that rationally this is the right step going forward," Elop told reporters, though he added he also felt "a great deal of sadness" over the outcome.
"I feel sadness because inevitably we are changing Nokia and what it stands for," he said.
In three years under Elop, Nokia saw its market share collapse and its share price shrivel.
In 2011, after writing a memo that said Nokia lacked the in-house technology and needed to jump off a "burning platform", Elop made the controversial decision to use Microsoft's Windows Phone for smartphones, rather than Nokia's own software or Google's
Nokia, which had 40 percent of the handset market in 2007, now has just 15 percent, and only 3 percent in smartphones.
Shares in Nokia surged 39 percent to 4.10 euros on Tuesday. While up from their decade-low of 1.33 euros hit last year, they are still only a fraction of their 2000 peak of 65 euros.
After today's gains the whole company is worth about 15 billion euros, a far cry from its glory days when it peaked at over 200 billion euros.
Tuesday's deal includes an agreement to license Nokia's patent portfolio for 10 years. Without it, Nokia's devices and services business would have been worth about 3.7 billion euros, the companies said.
Microsoft shares in Frankfurt were down about 5 percent.
GRAPHIC-Nokia's numbers: http://link.reuters.com/sus72v
Interactive look at Nokia: http://link.reuters.com/guz42t
GRAPHIC: Microsoft's share price foundered under Ballmer http://link.reuters.com/cyd62v
SOLD FOR "PEANUTS"
While some investors have credited Elop for bringing urgency to Nokia, which has stepped up its pace of product development in recent months and is due to announce a "phablet"-type large-screen handset this month, his legacy will be a bitter one for Finland. The company, which began life as a paper mill and has sold an eclectic range from television sets to rubber boots in its 148-year history, was a national champion in its heyday, accounting for 16 percent of all exports.
Hired by former chairman Jorma Ollila, Elop was the first foreigner to lead it.
For many Finns, the fact that a former Microsoft executive had come to Nokia, bet the firm's future on an alliance with Microsoft, laid off about 40,000 worldwide and then delivered it into Microsoft's hands, was a galling snub to national pride.
"Jorma Ollila brought a Trojan horse to Nokia," a column in widely read tabloid Ilta-Sanoma said.
"As a Finnish person, I cannot like this deal. It ends one chapter in this Nokia story," said Juha Varis, Danske Capital's senior portfolio manager, whose fund owns Nokia shares. "On the other hand, it was maybe the last opportunity to sell it."
Varis was one of many investors critical of Elop's decision to bet Nokia's future in smartphones on Microsoft's Windows Phone software, which was praised by tech reviewers but hasn't found the momentum to challenge the market leaders.
"So this is the outcome: the whole business for 5 billion euros. That's peanuts compared to its history," he said.
Alexander Stubb, Finland's Minister for European Affairs and Foreign Trade, said on his Twitter account: "For a lot of us Finns, including myself, Nokia phones are part of what we grew up with. Many first reactions to the deal will be emotional."
Nokia's new interim CEO Risto Siilasmaa painted a picture of just how grudgingly the call to sell had been arrived at, describing how the board had met almost 50 times after the approach by Microsoft around February.
Ballmer, at a news conference in the Finnish capital, sought to assuage fears the deal would hit jobs in the Nordic country and said Microsoft would build on the recent growth of Nokia's flagship Lumia smartphones.
Nokia said it expected around 32,000 people of its roughly 90,000 worldwide staff would transfer to Microsoft, including about 4,700 who will transfer in Finland.
PIVOTAL FOR MICROSOFT
It is also a pivotal moment for Microsoft, which still has huge revenues from its Windows computer operating system, Office suite of business software and the X-Box game console, but has failed so far to set up a profitable mobile device business.
Microsoft's own mobile gadget, the Surface tablet, has sold tepidly since it was launched last year.
"It's a bold step into the future - a win-win for employees, shareholders and consumers of both companies," Ballmer said. "Bringing these great teams together will accelerate Microsoft's share and profits in phones and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services."
The move leaves the Finnish company with Nokia Solutions and Networks, which competes with the likes of Ericsson
The Nokia deal thrusts Microsoft deeper into the hotly contested mobile phone market, despite some investors urging it to stick to its core strengths of business software and services.
Elop will return to Microsoft as its board ponders a successor to Ballmer, who will depart in the next 12 months.
Activist fund manager ValueAct Capital Management, which has been offered a board seat, is among those concerned with Ballmer's leadership and his attempts to plough headlong into the lower-margin, highly competitive mobile devices arena.
Others applauded Ballmer's aggressive gambit.
"Microsoft cannot walk away from smartphones, and the hope that other vendors will support Windows Phone is fading fast. So buying Nokia comes at the right time," said Carolina Milanesi, an analyst at Gartner.
"In today's market it is clear that a vertical integration is the way forward for a company to succeed. How else could Microsoft achieve this?"
As part of Microsoft, Elop will head an expanded Devices unit. Julie Larson-Green, who in July was promoted to head a new Devices and Studios business in Ballmer's reorganisation, will report to Elop when the deal is closed.
FIRE SALE
Analyst Tero Kuittinen at consultancy Alekstra said the sale price of Nokia's phone business, about a quarter of its sales last year, represented a "fire sale level", though others were less clear about what a shrunken Nokia was worth.
The price agreed for the devices and services business gives it an enterprise value of about 0.33 times sales for a loss-making business, about half what Google paid for Motorola's handset business in 2012.
"What should be paid for a declining business, where market share has been constantly lost and profitability has been poor?" said Hannu Rauhala, analyst at Pohjola Bank. "It is difficult to say if it's cheap or expensive."
Nokia is still the world's No. 2 mobile phone maker behind Samsung, but it is not in the top five in the more lucrative and faster-growing smartphone market.
Sales of Nokia's Lumia series have helped the market share of Windows Phones in the global smartphone market climb to 3.3 percent, according to consultancy Gartner, overtaking ailing BlackBerry Ltd
Nokia said in a statement it expected that, apart from Elop, senior executives Jo Harlow, Juha Putkiranta, Timo Toikkanen, and Chris Weber would transfer to Microsoft when the deal is concluded, probably in the first quarter of 2014. (Additional reporting by Terhi Kinnunen, Jussi Rosendahl and Niklas Pollard; Editing by Peter Graff and Will Waterman)
