Microsoft buys Nokia mobile business for $7.2 billion

Nokia chief executive Stephen Elop (left) welcomes Microsoft chief executive Steve Ballmer (file photo) (Reuters / Luke MacGregor)

Microsoft is buying Nokia's smartphone business and a portfolio of patents and services in an attempt to improve its position in the mobile market and compete with Apple and Google at a time when more people pursue their lives on mobile devices.

The $7.2 billion deal announced late on Monday marks a major step in Microsoft's push to transform itself from a software maker focused on operating systems and applications for desktop and laptop computers into a  more versatile and nimble company that delivers services on any kind of internet gadget, the Associated Press reports.

The acquisition will represent the second most expensive deal in Microsoft's 38-year history, ranking behind an $8.5 billion purchase of internet telephony and video conferencing service Skype.

The deal sent Nokia's Helsinki-listed shares higher by as much as 48 percent on Tuesday, which was ranked by Bloomberg as a record advance. Microsoft's shares fell around 1 percent in pre-market activity.

Microsoft, which has dominated the PC software market for the past 30 years, is now under increasing pressure. More people are shifting to smartphones and tablet computers, causing the demand for PCs to shrivel.

As Microsoft weakened, Apple, the maker of the trend-setting iPhone and iPad, as well as Google, which is behind world's most popular mobile operating system, Android have been gaining pace.

Finland – based Nokia and the US tech giant Microsoft first tried to cooperate in the smartphone market in 2011. Under the alliance, Nokia's Lumia smartphones have run Microsoft's Windows software, though the devices have not been as popular as the iPhone or an array of Android-powered devices spearheaded by Samsung Electronics' smartphones and tablets.

Microsoft is betting it will have a better chance of narrowing the gap if it seizes complete control of how the mobile devices work with its Windows software.

The deal is expected to be completed early next year. If that timetable pans out, about 32,000 Nokia employees will transfer to Microsoft, which currently has about 99,000 workers.

Microsoft expansion into mobile devices hasn't fared well. Last year, the company began selling a line of tablets called Surface in the hope of competing with Apple's iPad. The version of Surface running on a revamped version of Microsoft's Windows operating system fared so poorly that the company absorbed a $900 million charge in its last quarter to account for the flop.

Nokia plans to hold a news conference in Finland on Tuesday morning to outline the deal. Microsoft executives will elaborate on their rationale for the deal shortly after Nokia wraps up its presentation.

Microsoft CEO Steve Ballmer speaks during the press conference of the Finnish mobile manufacturer Nokia in Espoo on September 3, 2013. (AFP Photo / Markku Ulander)

Microsoft transition

The acquisition is being made at a  time when  Microsoft is looking for a new leader. Just 10 days ago, Steve Ballmer, 57, announced he will step down as the company’s CEO within a year. Many analysts took the step as Microsoft's tacit admission that the company needed an infusion of fresh blood to revitalize itself.

The deal could fuel speculation that Nokia's CEO, former Microsoft executive Stephon Elop, will emerge as a top candidate to succeed Ballmer. Elop will step aside as Nokia's President and CEO to become executive vice president of Nokia devices and services in preparation for joining Microsoft once the acquisition closes. Chairman Risto Siilasmaa will stay in his current role and assume the duties of interim CEO.

Tony Bates the ex-boss of Skype, is also regarded as a potential successor to Ballmer.

The money to buy Nokia's smartphones and patents will be drawn from the nearly $70 billion Microsoft holds in overseas accounts as of June 30.