Microsoft announced that it is purchasing Nokia's mobile handset business for EUR 5.44 billion, or approximately $7.2 billion. We think this is an important step in Microsoft's evolution into a devices and services company, although execution will be the key. We will re-evaluate our model, but we are keeping our $35 fair value estimate and wide economic moat rating for now.
Strategically, we believe this move makes sense for Microsoft as it relates to the company's recently unveiled devices and services strategy. Previously, the Microsoft-Nokia partnership resembled a three-legged race, as hardware, software, and marketing from two different firms tried to march in lockstep. As Microsoft looks to build on its presence in smartphones, we think this deal should help reduce the strategic frictions, provided the combination and cost-cutting go smoothly.
Microsoft will be using $7.2 billion in cash from its balance sheet. With approximately 90% of its cash stashed overseas, this allows the firm to use the cash without the tax consequences of repatriation. Microsoft will continue to operate the handset business in Finland and open a new data center in Finland, and it has made available to Nokia EUR 1.5 billion of financing in the form of convertible notes.
We believe execution will be the key to this transaction. Because Microsoft will now own all of the components in the smartphone value stack, it should be easier for it to respond more nimbly to changes in the market.
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