Case Study of a Failed M&A— Introduction to Microsoft’s Acquisition of Nokia

On September 3, 2013, Microsoft announced that it would acquire Nokia’s mobile phone division for $7.2 billion. Through a series of missteps, many of them cultural mismanagement, Microsoft informed the public in May 2016, of its intention to write off most of the $7.2 billion it paid for Nokia and agreed to sell the mobile devices unit to HMD Global and Foxconn Technology for just $350 million. This series uses the Mergers and Acquisitions Synergies Framework to explore the cultural issues that lead to Microsoft’s failed merger with a highly regarded mobile phone company.


During the 1990’s and early 2000’s, one company dominated the mobile industry: Nokia. Established in 1871, the Finnish-born company gained a worldwide reputation for producing reliable, standard mobile phones that were internet-enabled and programmed with an array of multimedia features. Eventually, competition in the mobile phone sector rose in 2007 when Apple introduced the iPhone, and Nokia soon found its market share rapidly decreasing.1 Initially, Nokia predicted the smart phone craze would die out and consumers would return to standard mobile phones, but smart phones proved to be more than a passing trend. Nokia’s management failed to understand the wave of radical innovation that revolutionized the mobile industry—as Samsung and Apple produced and sold touch-screen phones. Nokia’s failure to react to the changing competitive climate is reflected in the precipitous fall in its share price from the iPhone’s introduction to Nokia’s own smartphone introduction: its market share faltered, losing almost 10 percent.2

On 10 September 2010, Nokia parted ways with its CEO (Kallasvuo) and hired Microsoft executive Stephen Elop. Hiring Elop was a significant move for a few reasons: he was the first non-Finn CEO in company history, and analysts predicted that hiring Elop would lead to closer cooperation between Microsoft and Nokia3.  Elop pledged to “reverse the company’s market share losses by ‘regaining [Nokia’s] smartphone leadership, reinforcing [Nokia’s] mobile device platform and realizing [Nokia’s] investments in the future.’”4

True to analysts’ expectations, it did not take long for a partnership to arise between Microsoft and Nokia.  On 11 February 2011 Nokia announced a “broad strategic partnership” with Microsoft. The partnership made a lot of strategic sense considering Microsoft’s dominance in software and Nokia’s in hardware – namely the production of mobile phones. The partnership was heralded by the media: “The deal makes Microsoft a key contender and gets Nokia back to the forefront of the smartphone revolution.”5 Despite optimism from analysts, the announced partnership was met with met displeasure among Finns, and Nokia’s share price tumbled 10 percent.6

In 2012 Nokia released its new smartphone, the Lumia, which ran on Window’s newly released OS – Windows 8. Initially, the release of the Lumia led to increasing, albeit tepid, sales for Nokia. Two years after announcing the partnership, Nokia was still losing market share to Apple and Samsung.  Microsoft’s performance during the period didn’t fare much better than Nokia’s. Microsoft’s poor performance was primarily caused by vehement resistance of Windows 8 from PC users, who detested its optimization for mobile devices. With both companies struggling to keep up in the fast-paced smartphone market, they were left to search for a more drastic solution than mere partnership.

On 3 September 2013, Microsoft CEO Steve Ballmer announced that Microsoft would acquire Nokia’s mobile phone division for $7.2 billion.7 Microsoft had been looking for a way to enter the mobile phone industry to better compete with Apple and Google. In acquiring Nokia’s services and devices unit, Microsoft took control of Nokia’s mobile phones and smart devices, design team, licensing agreements, and approximately 32,000 new employees. Given Microsoft’s prowess in software and Nokia’s in devices, the acquisition was anticipated to be a smooth, successful transaction. Furthermore, both CEOs (Ballmer and Elop) acknowledged the acquisition as something that would build upon the existing Nokia-Microsoft partnership.8 In a press release in 2013, Elop told reporters,

“‘Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing, and manufacturing. With this combination of talented people, we have the opportunity to accelerate the current momentum and cutting-edge innovation of both our smart devices and mobile phone products.’”9

February 2014 marked the beginning of the newly formed Microsoft Mobile (a subsidiary of Microsoft). Later, in October 2014, Microsoft Mobile announced that Microsoft Lumia would replace the iconic Nokia on the smartphones.10

Despite Microsoft Mobile’s best efforts, the union proved to be tenuous at best, with job cuts of 12,500 and 7,800 occurring in July 201411 and July 201512 respectively.  Finally, on 18 May 2016, Microsoft informed the public of its intention to write off most of the $7.2 billion Nokia deal and an agreement to sell the mobile devices unit to HMD Global and Foxconn Technology for just $350 million.13 The company also announced that it would no longer produce new phones. What had seemed to be a promising venture had feebly wilted.

Differences in national culture severely affected Microsoft’s deal with Nokia. The M&A Synergies Framework identifies the relevant cultural aspects of the Nokia-Microsoft merger and offers insight into what caused the acquisition to fail. These insights point us to things to consider when preparing for cross-border deals between American and Finnish companies.

M&A Synergies Framework

The M&A Synergies Framework was created to analyze culture’s effect on cross-border deal making. Differences in national culture can lead to increased creativity within companies; however, they can also incite bitter conflict. The framework directs dealmakers to better understand how culture can affect their ability to realize synergies, which are the primary rationale for deal making. The framework elaborates on the following cultural elements: communication, behavior, management, environment, and accounting and finance. The M&A Synergies Framework is discussed fully in another series that can be found on This case studies uses the Framework as the basis to understand the cultural reasons why Microsoft’s acquisition of Nokia was not successful.

Next: M&A Synergies Framework—The Role of Communication in the Microsoft-Nokia Merger

M&A Synergies Framework: Due Diligence Checklist—Accounting and Finance

This is a brief checklist of accounting and finance items to address when evaluating merger and acquisition synergies between two firms. For a more detailed discussion, see M&A Synergies Framework: Accounting and Finance

Accounting Methodology

Accounting Standards. Countries use various accounting standards including International Financial Reporting Standards (IFRS) and their own Generally Accepted Accounting Standards (GAAP).

    • Understand that countries account for transactions differently. Knowing that countries account for transactions differently will help forego mistakes in valuing your target company.

Valuation. Differences in accounting standards, professional behaviors, and valuation methods can cause under- and over-valued bids.

    • Decide on a walkaway price before negotiations. Overvaluation of a company will result in write-off of goodwill. Although goodwill write-off is still possible, deciding on a walkaway price will likely prevent you from overpaying and thus prevent a large write-off in the future.

Professional Behavior

Professionalism vs. Statutory Control.1 The level of professional judgement used when recording transactions varies between countries.

    • People that are less educated may need training to reach the level of professional judgement needed.2 Take time to evaluate the level of professional understanding within each company and decide how to best train them.

Uniformity vs. Flexibility.3 Uniformity versus flexibility is a long-debated issue with no clear end.4  It is still necessary to consider when merging with another company, both in another country and in your own country.

    • Be aware that although accounting standards are set, the way a company interprets them may be different. Taking uniformity and flexibility into account will better help your company in the accounting due diligence process.

Conservatism vs. Optimism.5 The level of risk and caution preferred by certain culture differs. Below are some suggestions for working with conservative countries.

    • Check income and expense recognition of the target company. Some research suggests that conservatism creates less persistent income over time.6
    • Check asset valuations. Research has also shown that conservative cultures are more likely to undervalue their assets.7
  • Secrecy vs. Transparency.8 The amount of information a company publicly discloses differs between cultures.
    • Take time to teach employees the desired level of transparency. Since cultures have different ideas of the acceptable amount of information shared with the public, it is important to teach all accounting and finance employees the correct standards used by the company.

Fraud/Earnings Management. Because of the differences in accounting seen in the above values, the likeliness of fraudulent behavior is high when looking to abroad.

    • Consider a country’s Corruption Perception Index before merging. The Corruption Perception Index (CPI) score will tell you how prevalent corruption is within the country. This CPI could likely relate to the level of corruption within the company, which will provide clues about their accounting.

Previous: M&A Synergies Framework: Due Diligence Checklist—Environment

Case Study of a Successful M&A—The Role of Management in Lenovo’s Acquisition of IBM PC

Determining who should lead the newly merged company is a critical decision. Management and employee turnover is disruptive and adds stress to the organization as it integrates people and processes. The new Lenovo team recognized that leadership and the way they make decisions would mean the difference between success and failure.


Leadership Turnover. Lenovo split top management positions almost exactly in half between Lenovo leaders and former IBM leaders. As part of this change, IBM’s Steve Ward was assigned to be the integrated company’s new CEO while former CEO Yang Yuanqing stepped into the position of chairman.1 Most popular news sources evaluated this as a wise decision. One source stated that, “as they enter foreign markets, Chinese execs realize they lack essential skills. ‘China needs brand names, reach, logos, marketing, distribution — and the management that attends to all of those.’”2 In fact, a search for management talent may have in part motivated the acquisition as a whole. As CFO Mary Ma said, “We were simply finding a boss for ourselves.”3

Lenovo has continued to choose leaders of various backgrounds and as of 2015, had seven nationalities represented on its top management board, an unusual accomplishment even among globalized companies. Upper management boasts upbringing and education from a variety of nations including France, Italy, U.K., Australia, and of course, the U.S. and China.4 Although study results are mixed with regards to the effectiveness of having diverse leadership, the findings of 53% higher ROE (Return on Equity) and 14% higher EBIT margins (Earnings Before Interest and Taxes) in the world’s most diverse companies as compared to the least diverse companies seems to support the idea that diversity can significantly add real financial value. Among other benefits, if nothing else, “employing nationals from the target countries may help forestall some of the ‘liabilities of foreignness.’”5

In addition, Lenovo introduced a unique company-created position of “Chief Diversity Officer” in 2007 with the purpose “to ensure that Lenovo employs a broad array of talents around the world” as well to aide with cultural integration and awareness.6 Although at the time a Chief Diversity Officer wasn’t unheard of in other companies, Lenovo was the first Chinese company in any industry to staff this position.7 This allowed for clear upper management focus on cultural integration and signaled to both employees and the public that it was a top issue for Lenovo.

Employee Turnover. In the initial stages, Lenovo adopted a “parallel management” model for the acquisition, essentially treating the companies as two independently run branches.8 The only departments that were quickly integrated were those with functional purposes, such as HR and Finance. These efforts created a sense of security and continuity in the firm, which encouraged employee retention. One Lenovo employee stated, “We wanted them [employees from IBM] to realize our company was not a low budget traditional Chinese company… we kept the former welfare and salaries and didn’t cut off anything…”9 In fact, in the first year after the acquisition, the employee turnover was less than 2% allowing the company to retain intellectual talent.10 Eventually, with further integration in the Raleigh, North Carolina office in 2006, the company did have to execute some lay offs, which impacted 1,000 of the 21,400 employees at the time. These cuts were spread equally across all of the company’s geographical operating regions.11

Large Power Distance vs. Small Power Distance. Chinese culture tends to prefer a “Large Power Distance” between high-level and low-level employees.12 This shows a strong preference for clear distinctions between classes or roles, and an expectation that higher management to be respected and knowledgeable. Confucian principles are in part responsible for this philosophy that is still in effect within the Chinese workplace:

“To this day, perhaps because of their Confucian heritage, East Asian societies, from China to South Korea to Japan, have a paternalistic view of leadership that is puzzling to Westerners. In this kind of “father knows best” society, the patriarch sitting at the top of the pyramid rarely has his views or ideas challenged. And though Asian countries have begun to move past these narrowly defined roles in politics, business, and daily life, due in part to the growing influence from the West, most Asians today are still used to thinking in terms of hierarchy. They tend to respect hierarchy and differences in status much more than Westerners.”13

Although this mindset might be accepted in China, it is not a part of Western culture. The U.S. instead tends to be a low power-distance culture, preferring an “even playing field” between superiors and employees. Work is best completed and respect fostered if the boss is considered by the employees to be “one of us.”

Within Lenovo, “Western leaders talked more about the empowerment of the individual and tended to see traditional Eastern leadership as hierarchical and less flexible.”14 It appears that Yang Yanquing, who had originally set up the IBM acquisition deal and was re-established as CEO in 2009, recognized the existing power distances in the company and wanted to change them. He is “probably best known for his efforts to break down Lenovo’s hierarchies and empower employees at every level” even to the point where he divided his own $3 million bonus among lower-level employees.15 Additionally, “YY,” as he is called, made efforts to “Westernize” Lenovo as preparations were made for the IBM acquisition. Changes included dressing in a more Western style, receiving training on specific phone etiquette, and requiring employees to address leaders by their given name, rather than by formal title. Employees struggled to change their ingrained habits, but persistence prevailed. YY has been praised for these efforts to transform “the company’s culture from ‘wait and see what the emperor wants’ to a much more egalitarian, welcoming environment for colleagues from the West.”16

Decision Making

Consensual vs. Top-down. The Chinese have a strong top-down decision-making preference. The U.S. tends to be mid-range on a world scale, which makes it seem consensual by comparison to the Chinese. Several U.S. Lenovo employees expressed frustration with the top-down directive approach of Chinese management. These employees described Lenovo as a “Chinese company fully directed by chinese execs [sic] that don’t understand the US or world market,”17 and stated, “It seems all the power has shifted back to Beijing”.18

In contrast, it is obvious that the U.S. employees relied on a more consensual decision-making process. On, one employee located in North Carolina mentioned the following: “…lots of e-mails to process; lots of meetings to attend; decisions were made by group consensus.”19 Consensual decision-making was consistently employed at U.S. Lenovo locations. An employee said, “Sometimes its [sic] difficult to get decisions and directions approved because of the diversity of cultures.”20 Dealing with the contrasting approaches proved to be laborious.

Previous: M&A Synergies Framework—The Role of Behavior in the Lenovo-IBM Merger

Next: M&A Synergies Framework—The Role of Environment in the Lenovo-IBM Merger

Where There’s a Will, There’s a Way: The Brazilian Jeitinho

Brazil Street Art

Whether in business, government, or their personal lives, Brazilians have a knack for getting around difficult situations. They do this so often that there is even a word in Portuguese to describe it—jeitinho. Jeitinho literally means “little way” and can be used in positive or negative contexts.

Brazilian anthropologist Lívia Barbosa describes jeitinho this way:

…To be considered a “jeitinho,” the situation must involve an unforeseen and adverse event to the individual goal. The solution must be a special way—efficient and fast—to deal with the “problem.” It cannot be any strategy. It must produce short-term goals. … It does not matter if the solution is or is not final, provisional, ideal, legal, or illegal.1

Let’s imagine a situation: a group of men are building a two-story home. They need to move a load of bricks from the ground to the second story, but the only way to get to the second story is to climb a makeshift bamboo ladder. Rather than making dozens of trips up and down a rickety ladder with a ton of bricks, a few men stand on the ground and use a broomstick handle to toss the bricks up to the other men on the second story.2 This is an excellent example of how jeitinho can be used as a positive response to a problem.

Jeitinho can also be used in a negative context. Usually, this means that an individual, business, or even the government will act in a way that best serves their interests, even if it has a negative effect on those around them. A classic example involves individuals who only have a short time left on their lunch break and run to the bank to pay a bill. They see that the line is very long, but they also realize that one of the tellers is an old acquaintance. They walk to the front of the line and tell the teller about their desperate circumstances, managing to pay the bill while the rest of the line gets angry.

Not everyone uses jeitinho to skip a line or bend a rule. Business owners are sure to be impressed with the ingenuity and resourcefulness of their employees as they channel this trait in a positive way. As you prepare to visit or set up shop in Brazil, be prepared for everything its beautiful culture has to offer, and don’t be too surprised when you see someone finding their own “little way” to get something done.