Microsoft just got a $7.6 billion wakeup call from Nokia. The U.S. software goliath is writing off most of what it paid for a big piece of the Finnish mobile phone company in 2014. Microsoft’s M&A-related writedowns now tally about $14 billion over the past three years.
The $9.5 billion Nokia deal was the last in a string of bad deals struck by Chief Executive Satya Nadella’s predecessor, Steve Ballmer. It included $1.5 billion of acquired cash, and about $2 billion to license Nokia’s patents and maps. Essentially, the financial erasure on Wednesday – and the accompanying round of 7,800 layoffs – means the handset business is almost worthless, and that Microsoft overpaid for the intellectual property.
Ballmer agreed to the deal as he was stepping down as CEO. It was almost a fitting dud to end his tenure. Under his watch, Microsoft repeatedly attempted to move beyond its strength in business software by acquisition. In 2012, it wrote off nearly all of the $6.3 billion it paid for digital advertising agency aQuantive. And there are few signs the $8.5 billion Microsoft spent on Skype in 2011 has yet to pay off.
Microsoft shareholders at least can be relieved that Nadella has recognized the limits of ambition, even for a $360 billion powerhouse. It’s one reason the shares have outperformed the broader market since he was appointed the new boss after a long period of malaise under Ballmer. Microsoft may not be giving up on phones just yet, but the writedown suggests recognition that it won’t dominate in consumer hardware.
Yet Nadella has shown some worrying Ballmervian traits. He spent more than $2 billion on Minecraft maker Mojang last year. Given the checkered history of digital game makers, such as Zynga and Rovio, it could be a challenge to sustain popularity or generate another hit. Worse, Nadella was sniffing around Salesforce.com earlier this year. While the company is in Microsoft’s software and cloud wheelhouse, a $55 billion deal would have been a risky proposition, especially for a money-losing target.
Given how much money Microsoft has incinerated on M&A, Nadella probably should be taking the hint.