Microsoft is to acquire Nokia’s mobile phone business, including its patents and mapping services in a $7.2bn deal.
Analysts believe the deal is aimed mainly at speeding up innovation within Windows Phone and protecting its future through Nokia’s valuable patents.
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The companies said in a joint news release that the deal – which is still subject to approval by Nokia shareholders and regulators - will be finalised in early 2014, when about 32,000 Nokia employees will transfer to Microsoft.
The move comes two and a half years after the companies announced a strategic partnership in an attempt to regain market share lost to the rival iPhone and Android smartphone operating systems.
Android dominates with a 79% share of the market in the second quarter of 2013, followed by iOS with 14.2%. Windows Phone is third, yet had only 3.3% market share in the quarter, according to Gartner.
"It's a bold step into the future - a win-win for employees, shareholders and consumers of both companies," said Steve Ballmer, CEO at Microsoft.
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He told staff in an email that it was time to build on the momentum of the growth yielded by the partnership so far to accelerate Microsoft’s share and profits in phones, and described it as the next big phase of the transformation that was announced on 11 July.
Ballmer also highlighted that Nokia CEO Stephen Elop, who is widely tipped to be the next CEO at Microsoft, is to return to the company and will lead an expanded devices team, reporting to Ballmer.
Nokia said its board chairman, Risto Siilasmaa, would take over CEO duties while the firm looked for a new CEO.
Some analysts said the deal between the two companies will help Microsoft to be more competitive in the mobile market by enabling tighter integration between the hardware and the operating system.
Microsoft has also agreed to a 10-year license arrangement with Nokia to use the Nokia brand on current mobile phone products.
In announcing the deal, Microsoft said that it needs "first-rate Microsoft phone experience for users" to compete, which according to Engadget, suggests that its portfolio of devices is not quite complete.
The company has also been quick to attempt to allay the fears of its other mobile phone partners. Terry Myerson, executive vice president, operating systems took to the official Windows blog to say Microsoft will continue to license Windows phones to other manufacturing partners.
"Acquiring Nokia's Devices group will help make the market for all Windows Phones, from Microsoft or our OEM partners," he wrote.