Sometimes, businesses go above and beyond to build products or strike deals that they believe – after a lot of research and analysis – will be greatly beneficial in the long term. This is especially true when it comes to acquisitions. Microsoft for example, seems to have paid a lot more than it should have to get a hold of Nokia’s Devices and Services division (NDS), and as a result may have to write-off some of those costs from its books.
In Microsoft’s recent quarterly report filed to the US Securities and Exchange Commission, the company hinted that its phone hardware unit (i.e. the business acquired from Nokia) is currently rated a lower market value than what Microsoft paid for it. The excess value that Microsoft paid, also known as “goodwill”, is currently rated at $5.46 billion. Microsoft also notes that the goodwill was “primarily attributed to increased synergies that are expected to be achieved from the integration of NDS.”
As it turns out, that number may have been massively overestimated, and Microsoft notes in its quarterly report that its phone hardware unit is at “an elevated risk of impairment”, and “impairment adjustment is required, resulting in a potentially material charge to earnings”. According to independent analyst Ben Thompson, cited by NetworkWorld, that’s mumbo jumbo for “write-off”.
This wouldn’t be the first time Microsoft had to write-off an acquisition, Microsoft did the same thing following the acquisition of aQuantive, a digital marketing company that the software acquired for a then record $6 billion in 2007. Microsoft wrote it off for $6.2 billion, and moved on.
In the case of Nokia, it didn’t seem like Microsoft had a lot of choice in the matter. The company was desperate to get a hold of Nokia’s phone business for a number of reasons. Windows Phone wasn’t doing very well at the time, and as a result, Nokia wasn’t doing very well either despite its dominance of Windows Phone market share. As a result of that, the phone giant started experimenting with Android, which posed as a threat that Microsoft could potentially lose its largest Windows Phone partner, which also happened to have one of the strongest brand names in mobile. Microsoft’s only option was an acquisition, and if that meant overspending, then so be it. Yet some still think that Microsoft isn’t committed to Windows Phone.
“We continue to demonstrate momentum in the value smartphone segment of the phone market, driving 18% growth in Lumia volume this quarter. However, we need to take further action to reduce our costs across devices as we execute on our Windows 10 first-party hardware plans.” – Satya Nadella
“Microsoft is losing money (about 12 cents) for each phone it sells”
Despite the possible write-off, and despite the fact that Microsoft is losing money (about 12 cents) for each phone it sells, Microsoft has put all its effort to ensure that Lumia sales continue to grow, as is evident by the recent focus on budget Lumia devices. Microsoft is currently working on perfecting the Windows Phone formula by the time Windows 10 is ready to ship.
“The success of the Windows Phone platform is an important element of our goal to enhance personal productivity in a mobile-first and cloud-first world. The marketplace among mobile phone platforms is highly competitive. We may face issues in selecting, engaging, or securing support from operators and retailers for Windows phones due to, for instance, inadequate sales training or incentives, or insufficient marketing support for the Windows Phone platform.” – Microsoft
So there you have it. Windows Phone as a platform may be struggling, but it is evident that Microsoft has absolutely no intentions to abandon it, and will do everything that it can to keep it alive and transform it into a productivity tool that will actually make a difference in people’s lives.
