You could easily assume this Microsoft/Nokia merger was going to be a failure and be in good company. Large mergers are nearly impossible to pull off and Microsoft’s history with mergers hasn’t been very good. Look at Danger in particular, the last phone company it bought. It turned what was a good competitor to the iPhone into a dead product, and a core of employees wandered off and created Android, a better competitor for the iPhone, but at Google. Danger was an example of how not to do a merger, but Nokia is no Danger and the process Microsoft used is innovative, unique and very powerful.
There is a science to doing mergers, and firms like EMC and Dell showcase this science best. Ideally, you pick up a company that is much smaller, assure you don’t break anything by categorizing and protecting the key technical and human assets, and then move to assure the synergy you planned to create. Very few companies follow this process, which is why most mergers fail to generate their anticipated benefits. Big mergers are a very different beast and generally fail but, as I mentioned, Nokia is very different.
Let me explain.
A Phased Merger
What Microsoft did with Nokia is very different from a typical large merger. I really haven’t seen this method before. Nokia was in deep trouble when Stephen Elop was recruited to take over the company. Typically, in a merger, the costs of cutting the company and restructuring it are mostly borne by the buyer. But Elop effectively turned Nokia into a division of Microsoft before Microsoft bought it. Microsoft did co-fund transferring around a billion dollars into the process, but given that Microsoft is profitable, the cuts needed would have been incredibly expensive for the company (most European nations put a high burden on companies that are profitable and do layoffs). By keeping Nokia separate, Elop was able to radically downsize the company, which remained unprofitable more inexpensively. Without doing that first, Nokia would have been too expensive for Microsoft to buy. This minimized the cost to Microsoft of turning an overweight company into a division and reduced the risk; once downsized, had the firm been unable to function, which was a possibility, Microsoft would have been left with another vastly more expensive failure.
But Nokia was able to then show that it could grow share, assuring the value of the division and allowing Microsoft to then better justify the acquisition. In effect, Nokia is already a division of Microsoft now in all but financial reporting structure, making the acquisition more of a sure thing.
This is kind of like a couple living together and having a kid before they get married and combine financial resources. What Microsoft and Nokia did was hook together in a trial concept, demonstrate that the relationship could work, and then execute the merger once proof was clearly in hand. It is actually a rather brilliant move by Microsoft’s outgoing CEO Steve Ballmer and one that hasn’t been covered. In effect, this now becomes a best practice in terms of a large merger. It avoids the kind of problem Compaq had with DEC, where the cost of doing the restructuring nearly killed Compaq and forced it down a path of being acquired by HP – a path that would have been avoided had DEC restructured, particularly in Europe, before Compaq acquired it. Large mergers are company killers. By doing it this way, Microsoft has better assured that what it buys will be what it intended to get. Or, in other words, for a large merger, this process assured success.
Wrapping Up: Best Practice
This doesn’t mean this approach is perfect. Because the companies had to maintain arm’s length structure, a lot of common services were duplicated. Microsoft couldn’t makes use of Nokia’s distribution for products like the Surface tablet and the two were eventually going to have competing lines once Nokia released its own tablet. In addition, with split leadership and increasingly competitive hardware lines, cooperation was beginning to suffer, so the two parties had to finally get married to remove redundancies and increase cooperation. But that is all upside, though there is some risk that some of Microsoft’s policies, like Employee Forced Ranking, could cause the Nokia division to bleed key people (something that Microsoft still needs to address). This would have been a problem regardless, and using this phased approach meant that Microsoft assured that what it intended for Nokia actually worked before it bought the company. This is often how we buy technology and cars: We try before we buy. But this is the only time I’ve seen this practice exercised with multi-national companies.
Even though Steve Ballmer will likely leave Microsoft under a cloud, this move showcases that the guy has unique talents and would be very valuable on a board or as an executive advisor. You just don’t see this kind of creativity often. I think this approach for this kind of an acquisition should be considered a best practice. In the end, from a Microsoft perspective, this phased process assures the least risk and lowest cost and highest value and should be considered as a best practice.