FOREIGN TRADE UNIVERSITY

SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS

---------***---------

MIDTERM REPORT

ANALYSIS OF A CASE STUDY

MICROSOFT’S ACQUISITION OF NOKIA

Course : Negotiation and Conflict Management

Class : KDOE302.1

Lecturer : Dr. Vu Thi Bich Hai

Group : 10

Ha Noi, September 2023

 MEMBERS OF THE GROUP

No. Full Name Student ID

1 Phạm Trương Thục Anh 2112150021

2 Ngô Ngọc Chi 2112150037

3 Hoàng Quỳnh Nga 2113150049

4 Đinh Thị Minh Phương 2112150135

5 Nguyễn Diệu Quỳnh 2112150144

6 Vũ Trần Khánh Trang 2112150179

7 Vương Anh Tuấn 2112150154

8 Nguyễn Hồng Vân 2113150073

 TABLE OF CONTENTS

INTRODUCTION........................................................................................................ 1
SECTION 1: BACKGROUND INFORMATION..................................................... 2
1.1 Overview of Microsoft........................................................................................ 2
1.2 Overview of Nokia.............................................................................................. 3
1.3 Summary of the case study..................................................................................5
SECTION 2: ANALYSIS OF THE CASE STUDY................................................... 7
2.1 Driving forces behind the negotiation of the two parties.................................... 7
2.2 Negotiation process............................................................................................. 9
2.2.1 BATNA........................................................................................................ 9
2.2.2 Phase 1 (22/04/2013 - 20/07/2013).......................................................... 10
2.2.3 Phase 2 (20/07/2013 - 25/04/2014).......................................................... 12
2.2.4 Negotiation results.................................................................................... 15
SECTION 3: DISCUSSION AND RECOMMENDATIONS................................. 21
3.1 Differences in Nokia and Microsoft's negotiation techniques.......................... 21
3.2 Reasons for the failure of negotiation at Phase 1.............................................. 21
3.2.1 Impact of cultural differences between the two companies...................... 21
3.2.2 Microsoft's ineffective use of BATNA........................................................21
3.2.3 Nokia’s high esteem.................................................................................. 22
3.3 Recommendations for negotiating more effectively......................................... 22
CONCLUSION........................................................................................................... 24
REFERENCE.............................................................................................................. 25
APPENDIX.................................................................................................................. 27
 LIST OF FIGURES
Figure 1. Mobile phones produced per year for selected hardware providers …. 4
Figure 2. Market Shares of Mobile Smartphone Operating Systems …………... 5
Figure 3. Zone Of Possible Agreement (ZOPA) ……………………………….. 14

LIST OF TABLES
Table 1. Financial situation of Microsoft between 2010 and 2013 …………….. 16
Table 2. Financial situation of Nokia between 2010 and 2013 ………………… 16
Table 3. Financial situation of Microsoft in the years 2014 and 2015 …………. 17
Table 4. Financial situation of Nokia in the years 2014 and 2015 ……………... 18
 INTRODUCTION
The ability to negotiate effectively is a cornerstone of any thriving enterprise.
Successful business negotiation involves forging mutually beneficial agreements with
stakeholders, clients, and partners. These agreements can plunge in several terms,
including employee contracts, prices of goods and services, trading conditions, and
acquisitions - a critical strategy used to expand operations, increase market share, and
gain competitive advantage.
In the fast-paced world of today’s business, acquisitions have become increasingly
ubiquitous as companies strive to achieve growth and diversification. While carrying
out an acquisition may bring about valuable advantages, the negotiation process for an
acquisition poses immense challenges. Understanding these cases can be particularly
precious since it can provide insight into successful strategies and tactics. By
examining past negotiating cases, firms can identify patterns and learn from both
successful and unsuccessful outcomes. This knowledge can then be applied to future
negotiations, allowing for better preparation and results when acquiring new
businesses.
Among all the business acquisitions in the past few years, the purchase of Nokia
by Microsoft in 2014 was a momentous event in the world of technology. The $7.2
billion deal represented a turning point for both companies, as Microsoft entered the
mobile phone industry and Nokia underwent a significant transformation.
Therefore, Group 10 decided to provide an analysis of the negotiating process
through the case study of Microsoft’s acquisition of Nokia. This report will first
explore the background information of the two partners. Then, it will examine the case
study, from the driving forces behind the negotiation to the negotiation process.
Additionally, it will discuss and suggest further recommendations for both parties. The
structure of the report consists of three sections as follows:
Section 1: Background Information
Section 2: Analysis of the case study
Section 3: Discussion
Due to numerous limits, this report may have weaknesses. As Group 10, we hope
for feedback from our lecturer, Dr. Vu Thi Bich Hai, to improve our work and provide
a complete output, contributing to the field of business negotiation.

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 SECTION 1: BACKGROUND INFORMATION
1.1 Overview of Microsoft
Microsoft Corporation is a multinational technology company headquartered in
Redmond, Washington, USA. Founded on April 4, 1975, by Bill Gates and Paul
Allen, Microsoft has grown to become one of the world's largest and most influential
technology companies.
In the period of 2013 backwards, Microsoft made money primarily through the
sale of software server licenses, business productivity, and operating system software.
Microsoft's business productivity software suite, MS Office, was used for word
processing, spreadsheet preparation, presentations, and email. MS Office was sold
primarily to businesses worldwide. Microsoft's operating system software, known as
Windows, was sold primarily to PC manufacturers (such as Dell, HP, and Acer),
which sold Windows-based PCs to consumers and businesses. Its Server software
included MS SQL and Windows servers sold to application development companies.
The company had a market capitalization of above $200 billion and generated
revenues of approximately $70 billion in 2011. In Q1 2013, It had a dominant position
in almost all of the industries that it operated in. To be more specific, It had 95%
market share in the productivity software market, 75% share in the operating system
market and approximately 75% share in the server software market.
Until 2013, the company had completed many acquisitions. Some can be named
such as Vision Corporation ($1.4B, 1999, a software company based in Seattle,
Washington) Navision ($1.3B, 2002, which provided a suite of accounting
applications for small and medium-sized businesses), aQuantive ($6.3B, 2007, the
parent company of a group of digital marketing service and technology companies that
included Avenue A, i-FRONTIER, and Atlas DMT), Fast Search & Transfer ($1.2B,
2008, which developed software solutions focusing on enterprise search and is now
known as Microsoft Development Center Norway), Skype ($8.5B, 2011, a video chat
and internet communications service), Yammer ($1.2B, 2012, a private social
network for businesses that allowed users to share ideas, collaborate on projects, ask
questions, and solicit feedback), and many others. We can see that Microsoft did not
hesitate to make huge transactions to acquire other companies. This was, hence, a
development strategy for the company at that time and remains effective up until now.
To have a deeper understanding on the situation of Microsoft Corporation in 2013,
we have analyzed its strengths and weaknesses in this year.

a. Strengths
● Software Dominance: Microsoft's biggest strength in 2013 was its dominance
in the software industry, particularly with products like Windows operating
systems and Microsoft Office Suite. Windows was still the primary operating

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 system for the majority of personal computers, and Office was the leading
productivity software suite used in businesses worldwide.
● Enterprise Presence: Microsoft had a strong presence in the enterprise market.
Its server and cloud-based solutions, including Windows Server, SQL Server,
and Azure, were widely adopted by businesses, making it a significant player in
the corporate IT ecosystem.

b. Weaknesses
● Mobile and Smartphone Market: Microsoft struggled in the mobile space.
Windows Phone, their mobile operating system, faced fierce competition from
iOS and Android. The lack of a robust app ecosystem and a limited market
share were significant weaknesses.
● Consumer Perception: Microsoft's consumer-focused products, like Windows
8, received mixed reviews. Some users found the interface changes difficult to
adapt to, which led to negative consumer perception. This contrasted with their
strong enterprise presence.

1.2 Overview of Nokia

Nokia Corporation is a Finnish multinational telecommunications and consumer
electronics company that has a long and diverse history. It was founded in 1865 as a
single paper mill, gradually expanding into various industries over the years. In the
20th century, Nokia became a major player in the telecommunications industry.
In the 1990s and early 2000s, Nokia was a dominant force in the mobile phone
market, known for its innovative designs and reliable devices. The company played a
pivotal role in the development and popularization of mobile phones, introducing
iconic models like the Nokia 3310 and the Nokia Communicator series.
Nokia's downfall began with the rise of smartphones. The company struggled to
adapt to the touchscreen smartphone era, which was largely catalyzed by the
introduction of the Apple iPhone in 2007 and the Android operating system in 2008.
Nokia's Symbian operating system, which powered its smartphones, was unable to
compete effectively against these new platforms.
In 2011, Nokia made a strategic partnership with Microsoft and adopted the
Windows Phone operating system for its smartphones, rebranding them as Lumia
devices. However, this move did not reverse Nokia's decline in the smartphone
market, and in 2014, Nokia's Devices and Services division was sold to Microsoft.
After this, Nokia shifted its focus more toward network infrastructure and
technologies.

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a. Strengths
● History and Brand Recognition: Nokia had a rich history in
telecommunications and been recognized as a trusted brand by many
consumers around the world. The Nokia brand stood for durability, reliability
and maximum simplicity, making it beloved by people across the globe.
● Patents and Research: Nokia has a substantial portfolio of patents, especially in
wireless communication technologies, providing the company with
opportunities for licensing and generating revenue. Nokia had the strongest
patent portfolio in the wireless industry and had spent almost $62 billion in
research and development since 1989. The company has become a pioneer in
the development of portable and embedded memory technologies. The growth
in production of the number of mobile phones by Nokia, and some of its major
competitors, is presented in Figure 1.

Figure 1. Mobile phones produced per year for selected hardware providers

● Highly Competent Personnel: Nokia possesses the most experienced and

technologically advanced people in its workforce. In the field of mobile and
smartphones, it has gained a strong reputation for providing quality handsets.
Without an efficient workforce and expertise, it would not happen. In the
1990s, Nokia was an emperor in the field of technology.

b. Weaknesses
● Missed Smartphone Revolution: Nokia's inability to adapt to the smartphone
era in a timely manner led to a significant decline in its market share and brand
relevance in the mobile industry (Figure 2). One of the profound causes behind
its downfall is the introduction of the Symbian operating system, as Nokia was
slow to recognize the potential of smartphones and the shift from feature

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 phones to touchscreen devices. Therefore, they failed to anticipate the demand
for devices with advanced capabilities, such as app ecosystems and touch
interfaces, leading to a loss of market share to competitors like Apple's iPhone
and Android-based smartphones as well as deteriorating its customers’
attractiveness.
●

Figure 2. Market Shares of Mobile Smartphone Operating Systems

● Lack of Innovation In Products: The Nokia Lumia series was a jump-start

measure, but even that collapsed due to a lack of innovation. The unattractive
and dull features didn’t help. In the era of 4G, Nokia didn’t even have
3G-enabled phones. Nokia also came up with the Asha series but it was game
over by then.
● Transition Challenges: In 2006, Jorma Ollila was replaced by Olli-Pekka
Kallasvuo as CEO, the new management focused on mass production rather
than innovation, this transition presented its own set of challenges and
uncertainties. This was a profound mistake because innovation played a major
role in the rise of Nokia in the initial years. When Nokia realized its mistakes,
it was a little too late, by then Apple and Google were already established in
the market and their market share was steadily declining. Nokia’s Symbian OS
was outdated and no match for Android OS and iOS.

1.3 Summary of the case study

In 2013, Microsoft made the surprising announcement that it was purchasing
Finnish mobile handset maker Nokia, a merger aimed at building Microsoft’s mobile
and smartphone offerings. The merger faced even more complexity after the ink dried

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on the contract-namely, the challenges of integrating employees from different
cultures.
Under the terms of the agreement, Microsoft would pay $7.2 billion in cash to
purchase substantially all of Nokia’s Devices & Services business and license Nokia’s
patents. Microsoft would draw upon its overseas cash resources to fund the
transaction. The transaction was expected to close in the first quarter of 2014, subject
to approval by Nokia’s shareholders, regulatory approvals and other closing
conditions. Microsoft, in turn, acquired Nokia's handset business, along with 40,000
patent licenses, 32,000 employees and Stephen Elop rejoined Microsoft after receiving
a $25 million bonus.
This international business negotiation case study underscores the negotiation
process and difficulties that companies face when attempting to negotiate two
different identities. We divide the negotiation into two phases, phase 1 lasted from
April 22nd, 2013 to July 20th of the same year; phase 2 lasted from July 20th, 2013 to
April 25th, 2014. The negotiation includes many small details, including phone calls
and offline meetings. Phase 2 happened in order to resolve the conflicts occurring
since phase 1 and led to Microsoft’s final acquisition of Nokia, the details will be
analyzed in the following sections.

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 SECTION 2: ANALYSIS OF THE CASE STUDY
2.1 Driving forces behind the negotiation of the two parties
Prior to analyzing the case study, it is important to have a better understanding of
the two companies' driving forces because these factors will have a significant
influence on the approaches they take in the negotiations.

a. From Microsoft’s perspective

Before Microsoft's acquisition of Nokia in 2013, the two companies had forged a
strategic partnership beginning in 2011. In line with the agreement, Nokia had agreed
to adopt Microsoft's Windows Phone as the operating system for its smartphone
product line, with the objective of regaining a leading position in the competitive
smartphone market, where it faced strong rivals such as Apple and Google. This
partnership was expected to bolster Microsoft's presence in the hardware market,
ensuring it remained competitive in the digital era.
However, after two years, the collaboration seemed unsuccessful, as it could not
help either of them grow their market share or profits. Specifically, Windows Phone
did not draw as many manufacturers and users as anticipated, whereas Nokia faced
severe losses as using Windows Phone still could not help it compete with devices
running Android and iOS. Consequently, in 2013, Microsoft made the strategic
decision to acquire Nokia's devices and services units, with the goal of gaining full
control over the development of smartphones that seamlessly integrated with
Windows Phone. Microsoft believed that by utilizing Nokia's assets, reputation, and
industry expertise combined with its own software prowess, it could rapidly
strengthen its position in the hardware market with fewer resources and not lag behind
its rivals like Apple, Google, and Samsung. Another notable point is that, despite the
inefficient cooperation with Nokia since 2011, Microsoft still chose Nokia as its
acquisition target because their prior collaboration will save time in integrating the
two companies' competitiveness compared to building a new relationship, and 90% of
Windows Phone 8’s market share came from Nokia Lumia.
Furthermore, even though Nokia occupied a relatively small market share in the
smartphone market, its products and technology could provide a solid foundation for
Microsoft to build its own empire in this sector. Last but not least, at that time, Nokia
had been facing a severe financial crisis due to running out of cash, which facilitated
Microsoft's ability to exercise greater power in negotiations and drive down prices.
For Microsoft, the acquisition would not only reshape its business but also fortify
the company's device and services strategy, aligning it with the evolving trend of
“integrated devices and services” in the digital era. Microsoft intended to utilize
Nokia's R&D capabilities for innovative, software-compatible smartphones, enhance
the Windows Phone OS, and create an efficient integrated ecosystem of hardware and

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software, similar to Apple's successful approach, with the aim of enhancing the user
experience for Windows Phone. In other areas, Nokia's strong retail presence and
customer service focus would assist Microsoft in competing with Apple, which would
have a distribution advantage. Therefore, if the acquisition had been successful, it
would have marked a significant milestone for Microsoft as it ventured into the
competitive arena of hardware giants and gained tremendous revenue from this
lucrative market.

b. From Nokia’s perspective

The launch of the iPhone with the iOS operating system, as well as Google's
Android operating system, in 2007 marked a pivotal moment that reshaped the mobile
phone market, especially with the industry giant Nokia. Nokia, a pioneering force in
the mobile market, had dominated for 14 years with over 40% market share. However,
due to the conservatism in the company's operating system, while sticking to
developing the outdated Symbian software instead of adapting to touch device trends,
Nokia lagged behind other smartphone industry titans in the digital age like Apple and
Samsung.
In 2011, Nokia made the bold decision to abandon the "Symbian" operating
system and switch to Microsoft's Windows Phone software, hoping that it would help
them regain their leadership position. Unfortunately, the outcome of the combination
was not what Nokia expected. By 2013, after having once been a dominant player in
the industry, Nokia had dwindled to just 5% market share, facing financial and
strategic crises for some consecutive years. Nokia's stock price even dropped to
between $3 and $4 a share in 2013. To sustain the company, Nokia decided to sell its
devices and service units to Microsoft in 2013, and this was also the primary
motivation behind this acquisition. Moreover, Nokia still retained the right to use its
brand name for operating business but licensed the brand name to Microsoft for use on
its mobile phones for 10 years; hence, it can ensure the Nokia name is still alive on the
market.
This decision provided Nokia with huge capital to address the urgent situation at
hand and focus on other areas like telecommunications equipment, mapping business,
patent portfolio, and high-tech departments. Nokia did not cease phone production
entirely; instead, its employees transitioned to Microsoft, where they continued
making phones for the latter. As a result, Nokia's issue with layoffs could be resolved,
and employees' jobs would be secured. Overall, Nokia's decision to sell to Microsoft
was quite reasonable since Nokia lacked the financial resources to push its
smartphones to achieve the necessary acceleration. As Mr. Siilasmaa, Chairman of the
Nokia Board of Directors, stated in an interview, 'For Nokia, this is an important

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moment of reinvention, and from a position of financial strength, we can build our
next chapter.'
Another significant factor behind Nokia's decision to sell to Microsoft was its
CEO at the time, Stephen Elop, who was a former vice president of Microsoft. In
September 2010, Elop officially joined Nokia. After only 4 months, he made many
decisive and controversial decisions for Nokia, such as replacing the old Symbian
operating system with Windows Phone to compete with Android and iOS. Upon the
successful acquisition by Microsoft, Elop returned to Microsoft to continue working
under CEO Steve Ballmer, his former employer. This led to speculation that he might
have been a 'Trojan Horse' strategically placed by Microsoft. However, Elop denied
these claims, emphasizing that the entire Nokia leadership team played a role in the
decision to partner with Microsoft and that was not solely his subjective opinion.
Nevertheless, it cannot be denied that this also partly influenced Nokia's choice.

2.2 Negotiation process

2.2.1 BATNA
A wise negotiator will always take the other side's BATNA into account.
According to Mills (2005), the better a party’s BATNA is, the stronger its position in
negotiations will be.

a. BATNA of Nokia
Nokia has developed a BATNA for itself in the negotiations with Microsoft. After
2014, they planned to convert their devices to the Google Android operating system
instead of Windows. Nokia has used this BATNA to their advantage during the talks,
giving them the ability to reject a disappointing offer from Microsoft.
A team within Nokia had Android up and running on the company's Lumia
smartphones well before Microsoft and Nokia began discussing Microsoft's
acquisition of Nokia's mobile phone and services business. These people claimed that
Microsoft leaders were aware of the project's existence.
Nevertheless, a working Nokia Android phone could have been a potent
negotiating tool in Nokia's negotiations with Microsoft, a physical reminder that
Nokia could abandon Microsoft's Windows Phone software and switch to the Android
operating system. In order to deploy Windows Phone on its handsets, Nokia and
Microsoft agreed to cooperate in 2011. However, Nokia could dissolve that
relationship at the end of 2014. It would have been difficult for both parties to unravel
that agreement. Given that Nokia sells more than 80% of the Windows Phone devices,
it would have been disastrous for Microsoft's attempts in the mobile phone market.
However, Nokia would have suffered significant financial losses if it had accepted to

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adopt the Android OS for all of its smartphone product lines. Therefore, Nokia may
decide to sell its underperforming business to Microsoft or other businesses. The
lengthy negotiation process between Microsoft and Nokia may have increased
Microsoft's chance of losing the contract to a rival. Nokia was aware of Microsoft's
reasons for making the transaction since Microsoft's purchase gave them access to the
lucrative handset market, where they had set their sights on going head-to-head with
Apple and Google.

b. BATNA of Microsoft
Microsoft’s BATNA included cooperating with other manufacturers to expand
the Windows Phone market, such as Samsung, HTC, Huawei, etc., or developing its
own hardware devices like the Surface phone. However, as Microsoft lacked an
established reputation and expertise in the hardware industry, at that time, besides
Nokia, there were few other potential partners willing to collaborate on the
development of the Windows Phone. Major phone manufacturers like Samsung, HTC,
LG, and others prioritized using Android or building their own operating systems. For
another alternative option, if Micro produced its own mobile phones, it would require
substantial investments of money, time, and resources, with no guarantee of success.
Furthermore, the fast-paced technical environment did not allow Microsoft to conduct
such a time-consuming plan implementation; otherwise, it would lose ground with
Apple and Samsung in such a competitive and lucrative smartphone market. Due to
the above reasons, Microsoft's BATNA was considered not too strong, and Microsoft
was still inclined to seek collaboration with Nokia. As a result, Microsoft opted not to
utilize its BATNA during the negotiation process. Instead, it waited for Nokia to give
in, and Nokia's stock value decreased along with its handset division to secure the
deal. At that time, the BATNA was to coordinate their efforts and concentrate on
common goals and principles.

2.2.2 Phase 1 (22/04/2013 - 20/07/2013)

After 2 years of unfruitful partnership from 2011 to 2013, in January 2013,
Microsoft CEO Steven Ballmer made a phone call to Risto Siilasmaa, the chairman of
Nokia’s board of directors, suggesting the possibility of Microsoft fully acquiring
Nokia.
This first phase consists of different meetings and conference calls, revolving
around the main concerns of the Reservation Price of Nokia and other key issues,
especially the ownership of Nokia’s mapping service - HERE .
During this phase, both parties used Competitive Negotiation strategy – where the
two both tried to get the best outcome at the cost of the other’s position.

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 As regards their position in the industry, both Microsoft and Nokia had different
powers when they came to the negotiation:
● Microsoft: Microsoft had a strong financial position at the time of negotiation.
Additionally, considering the actual landscape, the increasing competition in
the mobile phone market had significantly reduced Nokia's sales and its market
share against competitors like Samsung and Apple. And Microsoft's OS could
potentially help Nokia gain a unique approach in this competitive market.
● Nokia: For a long time, they had gained a great reputation and extensive
experience in the mobile phone manufacturing industry, especially at hardware.
Considering Microsoft's desire of entering the mobile phone market and
widespread Microsoft OS platform to this market, Nokia believed that, with
their reputation, they were the best choice for Microsoft's plan.
Both parties had been quite confident in the negotiating advantage they could
gain, without caring much about the interests and benefits of the other party.
Therefore, in phase 1, both parties employed a Competitive Negotiation strategy.
The first meeting was held on 22nd, April 2013, at the New York offices of
Skadden Arps Slate Meagher & Flom, Nokia’s outside law firm.
The negotiation was held between two parties:
● From the side of Nokia: CEO Stephen Elop, Siilasmaa and the company’s top
in-house lawyer Louise Pentland and Chief Financial Officer Timo Ihamuotila.
● For Microsoft, the key negotiators were CEO Steve Ballmer, Windows Phone
unit head Terry Myerson, then-CFO Peter Klein, and longtime general counsel
Brad Smith.
As CEOs, both Elop and Ballmer have the right and power to negotiate directly
with each other about important decisions of the two companies’ future.
From the beginning, Microsoft immediately engaged in discussing the purchase
price of Nokia. Microsoft was highly focused on Nokia's vulnerability to the
possibility of bankruptcy. Microsoft approached and intended to buy Nokia as they
recognized that Nokia was facing financial difficulties, and they believed that Nokia
would greatly desire Microsoft’s capital and technology to survive through the hard
time. Microsoft considered this situation as their negotiation power, and tried to
pressure Nokia to accept a relatively low price.
However, Nokia had cultivated a strong BATNA strategy to deal with pressure
from Microsoft – their ability to revive its business by adapting to the Google Android
system and moving away from Microsoft’s Windows Phone software. Therefore,
Nokia executives immediately turned down this “disappointing proposal” after
listening to Microsoft’s first formal pitch. After that, both sides stated that they were
poles apart when it came to valuation and decided there was no point in meeting
further. The first meeting ended at a total impasse.

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 After many conference calls, along with some small meetings, a new sticking
point arose regarding Nokia’s mapping business - HERE.
At this time, HERE was a new and ambitious service from Nokia, replacing a
range of previous map services like Navteq, Transit, Pulse, City Lense,... Nokia aimed
to make HERE its sole positioning and mapping brand in 2013. Importantly, HERE
could appear on various mobile platforms as well as in the navigation systems of
many car brands, and this openness would help distinguish HERE from all other map
services in the world.
Nokia executives had a strong conviction in the necessity of owning the HERE
and their capability to sell the software to other firms, while Microsoft stated that they
couldn’t succeed in the mobile phone industry without having control over the
mapping technology.
The Competitive negotiation strategy continued to be evident when both parties
wanted the ownership rights to "HERE" because they both believed that this service
would bring many benefits to their business.
Although not all conflicts had been resolved, the attitudes of both parties had
undergone positive changes. Both sides had decided to continue working together to
find a solution to the impasse.
The turning point of the negotiations truly came during the meeting on July 20th
in New York. At this meeting, the executives of Nokia and Microsoft had found a
common solution to the HERE issue, and from there, the negotiation strategy of both
parties had officially shifted towards collaboration, and the billion-dollar negotiation
process entered its second phase.

2.2.3 Phase 2 (20/07/2013 - 25/04/2014)

The second phase in the negotiation process between Microsoft and NOKIA, early
in July 2013 in New York, began in the discussion of who would control the mapping
service and other problems relating to acquisition benefits. By applying a
Collaborative strategy, where two parties would find a common ground to align their
interests and concentrate on their shared values, this phase marked the next step in the
acquisition between two businesses. This strategy enabled two parties to seek a
win-win resolution in order to enhance the relationship as well as maximize the
outcomes of the negotiation and gain a significant advantage.
About the two companies at that time, on the one hand, Microsoft had a BATNA
approach with many additional options (HTC, Samsung, Huawei) but chose not to
employ it. Instead, Microsoft decided to wait for NOKIA to give in but after several
months, such delays were inappropriate given how quickly the technology devices
sector was developing. Realizing that NOKIA suffered from financial difficulties,
Microsoft sought to take advantage of the situation and was quite confident in its

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substantial capital, which may enable NOKIA to survive through the tough times.
Microsoft, one of the Big Five U.S. information technology corporations, has a great
reputation for its software products. Simultaneously, Microsoft was becoming more
eager to penetrate into the mobile phone business in order to compete with other
giants worldwide such as Google, Apple and gain market share.
On the other hand, using BATNA with the opportunity to switch to the Google
Android operating system in 2014 allowed NOKIA for greater power against
Microsoft, even when this option may be relatively costly. NOKIA was aware of
Microsoft's acquisition motives, and the fact that NOKIA accounted for more than 80
percent of the Windows Phone handsets sold could put Microsoft into a difficulty.
However during this time, NOKIA's sales consistently decreased over the years,
resulting in only 5% of market share in 2013. NOKIA had little possibility of
regaining its prior position in the market. Consequently, NOKIA urgently needed to
escape from its current situation by selling its underperforming business and gaining
financially.
By applying various strategies and understanding the necessity to focus on shared
values in order to strengthen the position of two companies in the market, the power
of two parties became more evenly distributed, turning the negotiation strategy into
Collaborative (win-win). In addition to their tight collaboration on product
development since 2011 as well as the relationship between the two CEOs of the
company, Microsoft and NOKIA at that time were the best choice to each other. As a
result, along with the patience from both sides lasting for several months, there is no
better option but to engage in further negotiations and approve the two-party
agreement.
Beginning on July 20th, 2013, Microsoft and NOKIA concentrated on identifying
ZOPA, defined as a negotiation range in which two parties may reach common
ground. Only the eight important executives from Microsoft and NOKIA were to
attend the meeting in New York City: Ballmer, Myerson, Smith, and Hood for
Microsoft and Siilasmaa, Elop, Pentland, and Ihamuotila for NOKIA. NOKIA wanted
to offer mapping technology to a wide range of partners, including competing mobile
phones, vehicles, and other cutting-edge equipment. At the same time, Microsoft
needed maps that could be utilized to its smartphones, tablets, PCs, and the Web.
Since this technology was software, two parties had an idea in the spirit of applying
Collaborative strategy, they would desire to profit from using the same code.
Microsoft received "rights equivalent to ownership" allowing NOKIA to keep the
intellectual property. The two parties commenced their due diligence, met daily,
evaluated different issues and started working on a definitive agreement with the goal
of finishing by September 3. Instead of a single deal, a number of contracts covering
patents, trademarks, the sale of the handset business, and the mapping agreement were
concluded. Finally, Microsoft and NOKIA reached the definitive ZOPA to unravel the

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commercial agreement after several in-person meetings between the two parties to
negotiate all aspects of the deal. On September 3 2013, it was announced that the deal
had been reached with a total transaction price of EUR 5.44 billion in cash, which was
equal to 7.2 billion dollars. The acquisition was completed with mutually beneficial
outcomes for both sides.

Figure 3: Zone Of Possible Agreement (ZOPA)

About Microsoft’s benefits:

● Acquiring NOKIA’s handset business and nearly 40,000 patent licenses
● Becoming a strategic licensee of HERE platform with an option to extend this
mutual patent agreement in perpetuity
● Hiring NOKIA CEO Stephen Elop as well as transfering 32,000 NOKIA
employees, including 4,700 people in Finland and 18,300 employees directly
involved in manufacturing, assembly and packaging of products worldwide
● About NOKIA’s benefits:
● EUR 3.79 billion for the Devices and Services business
● EUR 1.65 billion for the 10-year non-exclusive patent license agreement
Along with these advantages received from the acquisition, both parties also
negotiated and made regulations about more specific provisions in the terms of the
agreements to promote the development of the two companies in the future. With
faster innovation as well as greater synergies, Microsoft might move closer to its goal
of increasing the growth of its market share and profit in mobile devices. This deal
was also anticipated to greatly boost NOKIA's earnings and give the company a strong
foundation on which to build future investments in its ongoing businesses.
On April 25 2014, the acquisition to purchase NOKIA Devices and Services
business was officially completed after all the procedures to the approval by NOKIA’s
shareholders, regulatory approvals and other closing conditions. Two companies made
adjustments to the original deal throughout the close preparation process. They

14
decided to enter into numerous agreements with more clearly and detailed regulations
from manufacturing to IT.
● NOKIA’s board approval was completed in November 2013.
● Regulatory approvals from the E.U were completed in December 2013.
● The administration of online assets, thanks to the revisions, was defined that
Microsoft would take management of the NOKIA.com domain and social
media platforms instead of not covered as in the initial agreement.
● According to the initial agreement, NOKIA would retain all of its Chief
Technology Office personnel. In the finalization decision, the 21 employees in
China working on mobile phones would join Microsoft and proceed on their
work.
● In the initial agreement, Microsoft was to buy NOKIA's Korean manufacturing
site. The terms of the arrangement were changed, and Microsoft would not buy
the facility.

2.2.4 Negotiation results

a. General results
Having shed its underperforming handset business, Nokia planned to focus on
telecommunications equipment, mapping business, and patent portfolio. The deal
marked a belated but bold move by Microsoft to upgrade its presence in handheld
devices and signals an end to Nokia’s long struggle to enter the hyper-competitive and
extremely lucrative smartphone market. The acquisition of Nokia’s handset business
and key mobile IP licenses allowed Microsoft to produce better products, capture a
larger share of the profits, and grow the market for Windows-based mobile devices.
The deal was aimed at accelerating Microsoft’s smartphone market share as the
acquisition also allowed Microsoft to own the Lumia brand.
Overall, despite there being many factors that made the merger fail at the first
stage, the companies were able to overcome these challenges and reach an agreement
that was beneficial for both parties. At the end of the day, the acquisition of Nokia by
Microsoft was successful, as it allowed both companies to combine their strengths and
create a new ecosystem that could compete with other tech giants like Apple and
Samsung.

15
b. Performance evaluation of two companies after the deal
The negotiation was successful, but both corporations encountered difficulties and
hurdles in the immediate post-deal period.
● Pre-acquisition situation analysis
The following statistics data points for the securing period correspond to the
period before the year 2014:

In million dollars

Year 2010 2011 2012 2013 Average

Revenue 62,484.00 69,943.00 73,723.00 77,849.00 70,999.75

Operational Cost 12,395.00 15,577.00 17,530.00 20,249.00 16437,75

Gross Margin 50,089.00 54,366.00 56,193.00 57,600.00 54,562.00

Gross Margin Ratio 80.16% 77.73% 76.22% 73.99% 77.03%

Net Margin 18,760.00 28,071.00 22,267.00 21,863.00 22740.25

Net Margin Ratio 30.02% 40.13% 30.20% 28.08% 32.11%

EPS 2.13 2.73 2.02 2.61 2.37

Table 1. Financial situation of Microsoft between 2010 and 2013
(Source: academia.edu)

The statistics in Table 1 show that the company maintained its average gross profit
ratio at 77.03%. Revenues for the company were continuously expanding. The
company's four-year period from 2010 to 2013 saw an average revenue of
$70,009,950 million (Table 1). Additionally, the business was earning strong profit
margins at a rate of 32.11%.

In million dollars

Year 2010 2011 2012 2013 Average

Revenue 56,364.04 53,844.25 38,809.25 16,681.37 41,424.73

Operational Cost 39344.34 38079.15 28018.97 9781.602 28806.02

Gross Margin 17,019.70 15,765.80 10,790.38 7,099.77 12,668.41

Gross Margin Ratio 31.56% 28.14% 28.85% 42.06% 32.65%

16
 Net Margin 12,810.009 -23,615.90 -3,191.55 -3,446.56 -7,243.25

Net Margin Ratio 4.40% -2.28% -12.16% -4.84% -3.72%

EPS 0.68 -0.41 -1.11 -0.23 -0.27

Table 2. Financial situation of Nokia between 2010 and 2013
(Source: academia.edu)

In the case of Nokia, the company's gross margin ratio was maintained at a level
of 32.65%, as we can see in Table 2. However, the company's revenue was rapidly
declining. The company generated an average of $41,424.73 in revenue. Furthermore,
the company's profit margins deteriorated from 2010 to 2013, while its net margin
deteriorated dramatically. The net margin was -3.72% on average.
● Post-acquisition situation analysis
After Microsoft had officially acquired Nokia, there was a drastic transformation
in the financial situation of both companies. The following table depicts the case of
Microsoft post-merger:

In million dollars

Year 2014 2015 Average

Revenue 86,833.00 93,580.00 90,206.50

Cost of operations 27,078.00 33,038.00 30,058.00

Gross margin 59,755.00 60,542.00 60,148.50

Gross margin ratio 68.82% 64.70% 66.76%

Net margin 22,074.00 12,193.00 12,133.50

Net margin ratio 25.42% 13.03% 19.23%

EPS 2.66 1.49 2.08

Table 3. Financial situation of Microsoft in the years 2014 and 2015
(Source: academia.edu)

The company's profitability declined following the acquisition of Nokia's assets.

The gross profit margin fell from 73.99% in 2013 to 68.82% in 2014, and then to
64.70% in 2015. It should be highlighted that the corporation was able to improve its
revenues after acquiring the assets from Nokia in 2013. Sales revenues climbed from
$77,849 million in 2013 to $93,580 million in 2015. Despite revenue increases, the

17
company's gross margins fell, indicating an increase in operating costs. The increase
in operating costs indicates that the corporation did not benefit from economies of
scale from the acquisition of Nokia's assets. As a result, Microsoft gained no
operational or financial benefits from its acquisition of Nokia's assets. This merger
arrangement had a negative impact on the company's profitability, as seen by the
decline in net margin. In comparison to an average net profit margin of 32.11% in the
four years preceding the acquisition, the company could only sustain a net profit
margin of 19.23% in the two years following the acquisition. Furthermore, the
company's ESP dropped to $1.49 in 2015, from as high as $2.61 in 2013. Given the
poor financial performance following the acquisition, the corporation confessed that
the merger with Nokia was the biggest failure.

In million dollars

Year 2014 2015 Average

Revenue 16924.65 13878.89 15401.77

Cost of operations 9430.055 7823.88 8626.97

Gross margin 7494.59 6055.011 6774.80

Gross margin ratio 44.28% 43.63% 43.96%

Net margin 5975.17 7027.86 6501.52

Net margin ratio 27.19% 19.73% 23.46%

EPS 1.13 0.70 0.92

Table 4. Financial situation of Nokia in the years 2014 and 2015
(Source: academia.edu)

In the case of Nokia, on the other hand, there has been no fruitful financial
progress. Rather, revenue began to decline, falling to an average of $ 15,401.77. The
gross margin rate and EPS started to fall. As can be seen in Table 4, there has been no
fruitful development for Nokia, both operationally and financially, since the
acquisition.
Aside from this, a number of other factors are being discovered that are directly or
indirectly related to the acquisition process, and how those are greatly obsessing. The
following part will clearly illustrate all of the reasons behind this unproductive
development.

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c. Reasons for the unfruitful development post-merger
● Cultural differences
Even without the additional complication of merging two of the biggest
corporations in the world, each of which is distinctively representative of its mother
nation, combining different cultures can be a difficult and drawn-out process.
In this case, it was challenging as both countries needed to face several obstacles
related to cultural differences, which contributed to their failure to collaborate with
each other. Employees of these two companies must have faced a lot of difficulties.
Firstly, since both cultures are individualistic, a merger proved to become more
difficult as each employee chooses to advance his own interest instead of the
company’s. Secondly, the motives at work for the Americans and Finns are totally
different. Americans are motivated by rivalry and accomplishments, whereas Finns
are motivated by success as measured by well-being, free time, and flexibility.
Thirdly, as American society is considered to have weak uncertainty avoidance, they
tend to be more of a risk taker, while Finns see the opposite. Fourthly, both cultures
are task-based, which means they are committed to finishing the task at hand.
Although it is advantageous that they share a similar objective, issues arise when they
cannot build relationships with one another, which can result in mistrust and a lack of
cooperation. Lastly, whereas Americans tend to welcome confrontation and be flexible
in schedules, Finns tend to avoid conflicts and prefer a fixed schedule. These
differences made it hard for Nokia's employees to adapt to the new working
environment at Microsoft.
● The changing environment
Nokia wasn't acquired by Microsoft until 2013. The smartphone scene had
transformed by that point. Each business was attempting to leap from one sinking ship
to another, which was a concern. Microsoft viewed Nokia's hardware and R&D
divisions as a short-term solution to its issues, while Nokia thought Windows Phone
would be able to update the software in its products. The acquisition of Nokia by
Microsoft made perfect sense, especially after the two companies' 2011 announcement
of their first strategic alliance. At that time, Elop and the business placed a backstop
bet on Windows Phone. There was no room for a third platform, whether it was
Symbian OS, Windows Phone, or anything else, given that the smartphone market was
now entirely a duopoly between Apple and Android. While customers anticipated
Nokia's release of its Android smartphones, Nokia chose to embrace Windows Phone
from Microsoft. Microsoft lacked hardware, whereas Nokia lacked software.
Therefore, Nokia expected this acquisition could reclaim its prior market share for
smartphones in the future as the sole hardware manufacturer for Windows Phone.
This, however, ended up being a catastrophe. The market rejected the Lumia series

19
because customers realized that iOS and Android were far more user-friendly than
Windows Phone.
● Challenges in Leadership
Another challenge that contributed to the failure of the merger between Nokia and
Microsoft was leadership turnover. The M&A happened during the end of the tenure
of the previous MS CEO Steven Ballmer; thus, the newly formed Microsoft Mobile
would operate with different management as soon as it started operations. Microsoft
did not wait for the employees of Nokia to fully adjust to the company climate of the
corporation as the differences between the two cultures in terms of power distance.
Finland has a lower power distance than America; thus it is more decentralized. Finns
normally decide as a group, unlike Americans who decide top-down.
● Another reason
Besides cultural differences and challenges in leadership, there are several factors
that contributed to the failure of the merger between Microsoft and Nokia. The merger
also failed to convince developers to produce software and applications for Microsoft
smartphone products, which run entirely on Windows Phone. Many developers are
already enjoying the benefits of using Google’s Android system in releasing their
applications. A switch in OS would also overhaul the applications partially or entirely,
which would entail additional costs that the Microsoft phones could not compensate
for given the low demand for the product. It also did not help that most apps that ran
on previous versions of Windows OS are not allowed to run on the new OS. The
market is saturated considering that a number of smartphone companies prefer to
produce phones using the Android system. This made it difficult for Microsoft to
compete with other tech giants like Apple and Samsung. Lastly, there was a failure of
Microsoft to capitalize on patents owned by Nokia. This resulted in a loss of potential
revenue for Microsoft.

20
 SECTION 3: DISCUSSION AND RECOMMENDATIONS
3.1 Differences in Nokia and Microsoft's negotiation techniques
In the negotiations between Nokia and Microsoft, both Competitive and
Collaborative negotiation styles were used effectively. Each type of negotiation style
was applied at different phases of the negotiation.
In Phase 1, Nokia and Microsoft employed a Competitive approach to maximize
their benefits. While Microsoft submitted a harsh price offer, Nokia used a
competitive approach to demonstrate their strength, because the Finns, Nokia's
partners, are used to slow-moving discussions and are unwilling to reveal their
demands. In Phase 2, the two companies used the “Collaborative Negotiation”
strategy, in which parties look for a win-win resolution to settle the problem. The
method is founded on the idea of creating value, which benefits each participant
significantly.
The BATNA was also used in the negotiation, but Nokia proved to be wiser and
used the BATNA more effectively than Microsoft, even though they didn’t have more
advantages than the opponent's. However, Microsoft can't make full use of its
BATNA. Microsoft could save money and create a win-win deal by using BATNA to
renegotiate a fair price for Nokia while also showing its alternatives apart from Nokia
(HTC, Samsung, and Huawei) to make Nokia more willing to accept the deal.

3.2 Reasons for the failure of negotiation at Phase 1

3.2.1 Impact of cultural differences between the two companies
At the first phase, the negotiation between Microsoft and Nokia took more time
than expected and couldn’t go to the final deal because of the differing cultures of an
American company and a Finnish company. Both cultures are individualistic, meaning
that each firm chooses to advance his own interest instead of the common benefit.
Americans are also more risk-takers than the Finnish. Problems arise when they can
not establish relationships with one another, which can lead to distrust and
noncooperation. Americans welcome confrontation, whereas Finns tend to avoid this.
The differences in behavior between the two companies were significant enough that
it led to distrust and noncooperation on both sides.

3.2.2 Microsoft's ineffective use of BATNA

If Microsoft used BATNA to negotiate a price that was fair and consistent with
Nokia's actual value, they could save a significant amount of time and money, and also
create a win-win deal for both parties.

21
 Additionally, Microsoft could also use BATNA to show that Microsoft still had
many other options outside Nokia such as HTC, Samsung or Huawei, which could
motivate Nokia to be more willing to accept the deal.
Otherwise speaking, Microsoft overestimated Nokia's worth and partnership
profitability, leading to a significant decrease in Nokia's handset business value two
years after talks began. As time passed, Market changes and delayed decision-making
made their original goals unattainable.

3.2.3 Nokia’s high esteem

Nokia had too high self-esteem and made the mistake of insisting on the selling
price without taking into account the advantages they might receive in exchange if a
deal were achieved. This can be understandable because for Finns, Nokia is pride:
"Nokia was the first Finnish multinational global company. Nokia made us feel proud
to be Finnish, but it also gave us the confidence for other ambitious Finnish
companies to be born." (Samuli Hänninen - vice president of software program
management for Nokia's Smart Devices business) If both parties put their partner's
interests ahead of their own, the negotiation could be more effective.

3.3 Recommendations for negotiating more effectively

3.3.1 From Microsoft's perspective:
Firstly, Microsoft needs to gain insights into cultural differences with Nokia. It is
better to view the opponents in negotiation as unique people rather than as a single
competitor. With Nokia's courage, Microsoft needs to be calmer and more harmonious
in pricing rather than forcing the opponent.
Moreover, Microsoft needs to use their BATNA or power sources more
effectively. In actuality, Microsoft had a clear financial advantage from the start.
Nevertheless, they were adamant about pursuing Nokia, despite the likelihood that
Nokia would reject its offer. Also, Microsoft shouldn’t overestimate Nokia's worth and
the profitability of the partnership and should know how to leave the deal before it
consumes too much time and money.

3.3.2 From Nokia's perspective:

Nokia ought to have been more accommodating during negotiations. In actuality,
Nokia took a competitive negotiation style in the negotiation. In particular, Nokia
insisted on the selling price without taking into account the advantages they may
receive in exchange if a deal were achieved. In fact, for a negotiation to be effective,
both parties must put their partner's interests ahead of their own. They must
successfully identify shared interests. Additionally, it's crucial to view potential

22
outcomes from a wide angle in the long run. In this instance, Nokia undervalued or
was unaware of the potential long-term gains from the agreement, which left the
agreement unclear and delayed the negotiation.

23
 CONCLUSION
In conclusion, Microsoft's acquisition of Nokia was a complex and challenging
negotiation that ultimately resulted in a mutually beneficial agreement for both parties.
By examining this case study, valuable lessons about successful negotiation strategies
and tactics can be learned. The driving forces behind the negotiation included the need
for Microsoft to enter the mobile phone industry and for Nokia to undergo a
significant transformation. The negotiation process involved careful consideration of a
wide range of factors, including price, intellectual property, and employee contracts.
After two phases of the acquisition, Microsoft was able to expand its operations and
gain a competitive advantage in the mobile phone market; in the meantime, Nokia
could focus on its core business areas.
However, the Microsoft-Nokia negotiations faced some challenges stemming from
cultural disparities and a subpar utilization of BATNA. Neither side was able to find a
common ground as they exclusively prioritized their respective interests. Furthermore,
both parties were unable to play to their strengths as well as to evaluate their
competitor and the market. This led to unnecessarily prolonged negotiations.
The failure of the initial stage, nevertheless, is a prerequisite, highlighting the
importance of thorough preparation and effective communication. A more effective
negotiation could have happened if both parties followed some of the
recommendations proposed above, ranging from research into cultural differences, and
efficient use of BATNA to a proper evaluation of the others' values.
One limitation is that this report focuses on a specific negotiation scenario, which
may not be easily applicable to other situations. Additionally, the information
presented in this report is dated back to 2013. Hence, certain aspects of this case study
might not be suitable in today's business context.
Despite these limitations, the analysis of Microsoft and Nokia negotiation remains
a crucial means of analyzing and communicating information about acquisition
scenarios, and when used effectively, can provide valuable insights and
recommendations.

24
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 APPENDIX

Figure 1. Manufacturers of Windows Phone 8 in 2013

(Source: adduplex)

Figure 2. Market share of the smartphone sector in 2013

(Source: Juniper Research)
Figure 3. Market share of Nokia and Microsoft in the smartphone market from 2010 to 2013
(Source: IDC)

Figure 4. Market share of Nokia in the smartphone market compared to Apple and Samsung
from 2007 to 2017 (Source: Statista)
Figure 5. Global Smartphone Market Share by Platform
(Source: Gartner)