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Microsoft buys Nokia: Can Microsoft go mobile?

Microsoft buys Nokia in a $7.2 billion attempt to catch up with the mobile computing revolution that threatens to leave Microsoft in the technological dust.

By Matti Huuhtanen and Michael LiedtkeAssociated Press / September 3, 2013

A Nokia phone displays the Microsoft logo in Vienna, Sept. 3, 2013. In an era when tech start-ups can be worth tens of billions of dollars, Microsoft's deal to acquire Nokia's mobile handset business for 5.44 billion euros ($7.2 billion) is modest from a strictly financial point of view, but could be a turning point for both companies.

Heinz-Peter Bader/Reuters

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Microsoft's acquisition of Nokia's troubled smartphone business represents a daring $7.2 billion attempt by the software giant and a once-influential cellphone maker to catch up with the mobile computing revolution that threatens to leave them in the technological dust.

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The deal announced late Monday offers both companies a chance to make up for lost time with a strategy to meld their software and hardware into a cohesive package, like rival Apple has done. But there are plenty of reasons to question whether the copycat approach will pay off.

Unlike Apple, Microsoft Corp. makes most of its money from software for personal computers — a still-profitable franchise that has gradually been crumbling as smartphones and tablets supplant laptop and desktop machines. By some estimates, more than two-thirds of the computing devices being sold now are either smartphones or tablets, and there are few signs that trend will change during the next decade.

To complicate Microsoft's transition, the Redmond, Wash., company is being led by a lame duck. Microsoft CEO Steve Ballmer, who negotiated the Nokia deal, recently announced plans to retire within the next year in a tacit admission that the company needs a different leader to blaze new trails.

The managerial limbo raises even more doubts about whether Microsoft will be able to turn Nokia's phones into more effective weapons in a mobile-computing battle against devices powered by Google Inc.'s Android software and Apple Inc.'s iPhone and IPad.

"It's a three-horse race, and Microsoft knows it needs to come up with a more well-defined plan for mobile devices to catch up," said Darren Hayes, a computer science professor at Pace University in New York. "This was an essential acquisition for them."

The Nokia deal didn't go over well with investors wearied by Microsoft's largely fruitless efforts to evolve into something more than a PC-dependent company.

Microsoft's stock shed $1.52, or 4.6 percent, to close Tuesday at $31.88. Nokia Corp.'s shares surged $1.22, or 31 percent, to finish at $5.12.

Nokia, a Finnish company, has seen its cellphone business unravel since Apple revolutionized the way people use handsets with the 2007 introduction of the iPhone. Nokia's problems grew worse in 2009 after Google began giving away its Android software to smartphone makers, spawning an array of sleek, low-cost alternatives.

In an attempt to bounce back, Nokia lured Stephen Elop away from Microsoft to become CEO nearly three years ago. That move has not worked out well for Nokia's shareholders. Even with Tuesday's rally, Nokia's stock remains about 40 percent below where it stood when Elop became CEO.

Despite those losses, Elop has emerged as a candidate to replace Ballmer as Microsoft's CEO. Elop is stepping down as Nokia's CEO to re-join Microsoft, where he will oversee the company's devices division. Nokia board Chairman Risto Siilasmaa will serve as the company's interim CEO.

Elop decided to abandon Nokia's old operating system in 2011 in favor of Microsoft's Windows system for phones. That move established Nokia as Microsoft's most important partner in the mobile device market. About four out of every five phones running on Windows are made by Nokia, according to the latest information from research firm International Data Corp.

Nokia accounted for such of large chunk of Windows phones largely because other manufacturers such as LG Electronics, Samsung Electronics and HTC have either been scrapping the system or de-emphasizing its use in favor of Android, said Forrester Research analyst Charles Golvin.

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