Microsoft (NasdaqGS: MSFT - news) is to acquire Nokia (Stockholm: NOKI-SEK.ST - news) 's mobile phone business in a €5.44bn (£4.61bn) deal which will see the Finnish company's chief executive Stephen Elop join the software giant.
The deal gives Microsoft access to Nokia's smartphones and its design team as it struggles to compete against rivals after missing the mobile revolution.
Steve Ballmer, who a few weeks ago announced his retirement from Microsoft after 30 years, said: "It's a bold step into the future — a win-win for employees, shareholders and consumers of both companies.
"Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services."
This Microsoft's first big play since Mr Ballmer's departure was announced.
Former Microsoft executive Mr Elop is one of the names in the frame to replace Mr Ballmer at the software giant.
The Finnish business used to dominate the mobile market with its virtually indestructible handsets. However, it was slow to develop smartphones and lost ground to Apple (NasdaqGS: AAPL - news) and other players like Samsung.
Mr Elop, who joined the company in 2010, famously compared Nokia to a man on a burning oil platform who had no choice but to jump.
Under his leadership, Nokia struck a deal to join forces with Microsoft to produce the Lumia series of smartphones, based on Microsoft's Windows operating system. The handsets have attracted a moderate level of critical success but sales have been slower than hoped.
Microsoft said the deal would enable the company to build on its 2011 partnership with Nokia and increase its share of the smartphone and tablet market through faster innovation.
Under the deal, Microsoft will pay €3.79bn to buy Nokia’s Devices & Services business, and €1.65bn to license Nokia’s patents for 10 years.
Nokia retains its patent portfolio and will also have reciprocal rights to use some Microsoft patents. However, it will grant Microsoft an option to extend this mutual patent agreement in perpetuity.
Microsoft is acquiring Nokia’s Smart Devices business unit, including the Lumia brand and products. It is also buying Nokia’s Mobile Phones business unit, which had sales of 53.7m units in the second quarter of 2013.
It also gets the Asha brand and will license the Nokia brand for use with current Nokia mobile phone products. Nokia will continue to own and manage the Nokia brand.
"This element provides Microsoft with the opportunity to extend its service offerings to a far wider group around the world while allowing Nokia’s mobile phones to serve as an on-ramp to Windows Phone," the software company said.
Around 32,000 people are expected to transfer to Microsoft, including 4,700 people in Finland and 18,300 employees involved in manufacturing, assembly and packaging of products worldwide.
The operations to be transferred to Microsoft generated an estimated €14.9bn - nearly 50pc of Nokia’s net sales for the full year 2012.
Nokia said it expects to book a gain on sale of around €3.2bn, and says the transaction will be "significantly accretive to earnings".
The deal is expected to close in the first quarter of 2014, subject to approval by Microsoft and Nokia shareholders and regulators.
• NSN - a leader in network infrastructure and services • HERE - a leader in mapping and location services • Advanced Technologies - a leader in technology development and licensing.
The deal will strengthen the company's finances and give is capital to invest in the businesses.
Risto Siilasmaa, the Nokia chairman and who will also be interim chief executive, said: "After a thorough assessment of how to maximize shareholder value, including consideration of a variety of alternatives, we believe this transaction is the best path forward for Nokia and its shareholders."
Microsoft has agreed to give Nokia €1.5bn of financing via three €500m tranches of convertible bonds. If Nokia decides to draw down on this financing, it will pay back the notes to Microsoft from the proceeds of the deal when it closes.
The financing is not conditional on the deal closing.