Among Western nations it would be difficult to find two cultures as different as the US and Finland. Americans are stereotypically confident and outgoing; Finns considerably more reserved. This is even reflected in the economies of the two nations: the US is the home of free-market capitalism; Finland is the poster-child of European social democracy.
These are just stereotypes, of course, but they do give you a hint of some of the real challenges that Microsoft is likely to face as it seeks to integrate Nokia’s mobile phone division, which it has purchased for €5.4 billion.
The purchase was announced with great fanfare by both Microsoft and Nokia senior management. For Nokia, the deal is seen as a way to exit from the handset market. Although they once dominated this sector, they are now well behind market leaders Apple and Samsung. For Microsoft, the purchase is a way for them to add a mobile hardware component that will allow them to compete head to head with Apple and Google.
Although the rhetoric around the deal sounds good, the reality is likely to be much messier. The research suggests that most mergers and acquisitions tend to destroy rather than create value.
Indeed, the history of Microsoft during the past decade has served as a remarkable case study of this basic rule. When outgoing CEO, Steve Ballmer, took over in 2000 it was absolutely dominant in its field and its share price was at an all-time high. During Ballmer’s tenure we have seen a stream of acquisitions, uncertain innovation and a stagnation of its shareprice. A New Yorker journalist recently quipped that Ballmer had finally figured out a way to make some money – he quit.
Maybe the acquisition of Nokia should be seen not as a shrewd strategic move, but more like one of the last great acts of the Ballmer regime. Indeed, research suggests that CEOs tend to become addicted to mergers and acquisitions, despite their declining returns.
The hubris of CEOs plays a big role here. Feelings of greatness often lead then to paint a rosy future picture of takeovers. They are also likely to overlook the significant risks that come with any acquisitions. This is all depressing news for Microsoft shareholders – if the research in the area is anything to go by, they are unlikely to see any significant gains from the acquisition of Nokia. In fact, they are actually likely to lose out.
But shareholders are not the only ones who will lose out. The future is likely to be relatively grim for employees in the Nokia phones division. There have already been reports in the Finnish press that many are worried about losing their jobs. This comes on the heels of a stream of layoffs in recent years.
But even for those who hold on to their jobs, life under the Microsoft regime is likely to be difficult. Merging cultures following an acquisition often proves to be difficult, if not impossible. A common outcome is talent staff crucial to the success of the company leave. Those who are left behind are likely to be relatively cynical. This typically leads to companies losing their innovate edge – often precisely what they were purchased for in the first place. This bodes poorly for the Nokia handsets division. Following the Microsoft deal it is likely to become an innovation deadzone, staffed by embittered cynics.
Members of the broader public are the final losers from this deal. Despite all the talk of how competitive the mobile business is, it is actually a market dominated by a few players. The increasing integration of hardware and software has meant a small handful of companies like Apple, Google and now Microsoft are in all our pockets.
This presents big concerns about who owns, controls and watches over our personal data. After all, many of these players are not just funky tech companies, they are also consumer surveillance companies. The purchase of Nokia by Microsoft represents a further step towards the consolidation of this market. But it also may represent a further step towards the consolidation of a few companies’ control over our personal data.
If this deal is likely to create so many losers, why is it going ahead? Well, there are likely to be some big winners as well. For one, Nokia shareholders seem to have benefited significantly with a big jump in share price following the announcement. The senior executives who put the deal together are also likely to do well out of the deal. Research suggests that when CEOs go on buying sprees – even unsuccessful ones - they are likely to get a bump in their reward package as well as a nice ego boost.
A final winner hidden in the wings is the army of advisers and consultants and such like who will gain a significant chunk of the transaction costs involved in trying to knit these two businesses together – and cleaning up the mess afterwards.