Case Study of a Failed M&A—The Role of Accounting and Finance in Microsoft’s Acquisition

Updated: Mar 26, 2021

Nokia provided financial reports using IFRS while Microsoft reported using US GAAP. Differences in national culture combined with different reporting requirements creates accounting and finance cultural differences. These differences can lead to financial reporting misunderstandings and possible valuation problems. Though there is little public information surrounding the rationale behind Microsoft’s valuation of Nokia, a consensus is that Microsoft paid too much for a company that had not been profitable for several years.

Accounting Methodology

Very little information concerning cultural differences within the accounting and finance fields is publicly available for this merger. There may have been some cultural conflicts due to differences in reporting standards; however, during the time of the acquisition, both Microsoft and Nokia were operating as global corporations, so each company already worked with integrating financial information from one country to another. Differences in accounting approaches between the U.S. and Finland are described below to provide context of the differences that could arise between these two cultures in the accounting and finance.

The fact that Microsoft Mobile was headquartered in Finland meant that they would have to translate their earnings from euros into dollars for Microsoft to report its consolidated earnings. Additionally, Microsoft Mobile would have to record accounting entries in IFRS for national reporting purposes but then translate its financial statements to comply with US Generally Accepted Accounting Principles (GAAP). The complexity of accounting for differences in international taxes, accounting methods, and reporting requirements is a reality faced by any multi-national entity.

Accounting Standards. As a member of the European Union, Finland adopted the International Financing Reporting Standards (IFRS) in 2005.1 IFRS is principles-based in nature, leaving more room for management to use judgement in interpreting, recording, and reporting economic transactions. The U.S. follows GAAP, which, many consider to be more rules-based. Consequently, management tends to follow specific rules instead of looking at the economics of a single transaction.2 The U.S. has considered the idea of adopting IFRS, but the Securities and Exchange Committee has signaled that moving from GAAP to IFRS is unlikely to happen.3 The implication of the U.S. adopting IFRS would allow for easier preparation for financial statements for multi-national entities, such as Microsoft. The impacts of differing accounting method for deals akin to Microsoft’s acquisition of Nokia’s mobile phone unit are relatively muted. One area of concern for cross-border deal makers is how accounting is practiced. As GAAP is heavily rules-based, there is little room for professional judgement. In contrast, IFRS (used by Nokia) allows for considerable judgment. Room for professional judgment leads to a greater diversity of practice among accountants, which can lead to potential discrepancies.

Valuation. Microsoft saw Nokia as a gateway into the mobile phone industry. Because of this vision, Microsoft seemingly overvalued Nokia and subsequently overpaid for the acquired company. Since that time, Microsoft has written off most of the purchase price from the deal.

At the time the deal was announced, Microsoft proposed purchasing Nokia’s Devices and Services for EUR 3.79 billion and purchasing the license to use Nokia’s patents for EUR 1.65 billion, for a total purchase price of EUR 5.44 billion. (In U.S. dollars, this price equated to about $7.2 billion.)4 Along with other factors and fees associated with the acquisition, the entire purchase price grew from $7.2 billion to $9.4 billion. According to Microsoft’s annual 2015 report, the total price included: $7.1 billion purchase price plus Nokia’s repurchase of convertible notes of $2.1 billion plus liabilities assumed of $0.2 billion.5 What Microsoft didn’t fully realize at this point in the agreement was that Nokia had been losing revenue for the past few years and was failing. “By 2012, [Nokia] was actually a drag on [Finland’s] GDP. Taxes paid by Nokia went to zero. And recently, Samsung began outselling Nokia phones even in Finland.”

One reason that Microsoft overpaid for Nokia is that they were in a scarce market. Microsoft was feeling pressure from Apple and Samsung and feared being left behind. To compete in the market, Microsoft was left with the choice to build a mobile phone unit from scratch or acquire a well-established company. Microsoft made the decision to buy one of the few already established firms. Amazon shows what could have happened had Microsoft entered the mobile phone industry without an established partner. In 2014, Amazon released its own smart phone, the Amazon Fire. Amazon’s attempt to enter the mobile phone industry also fared poorly, as indicated by the $170 million write-down they took relating to the Amazon Fire at the end of 2014.6

Microsoft’s failure to value Nokia’s mobile phone division led to truly disastrous results. Given what we know of Nokia’s rocky financial foundation, the deal was doomed to fail. The amount that Microsoft paid for Nokia has slowly been written off each year since the acquisition finalized. In 2016, Deutsche Welle (Germany’s international broadcaster) stated, “Nadella has already written off most of the Nokia deal struck by his predecessor Steve Ballmer in 2014. Earlier this month, it agreed to sell its feature phone business to a new Finnish company HMD Global and Foxconn Technology Group from Taiwan for $350 million.”7

Professional Behavior

In terms of behavior, both the U.S. and Finland have established professional associations where accountants are accredited to provide assurance services regarding a company’s financial position. Having an established accounting association adds to the professional practice of judgment rather than one reliant on statutory control.8 While both U.S. and Finnish accountants are flexible in practice, Finnish accountants tend to display a greater amount of uniformity with regard to professional practice than Americans.9

In the accounting profession, optimism refers to a societies’ method of valuing assets and recognizing revenue and expenditures. Accountants in countries displaying stronger inclinations toward optimism are more likely to recognize revenue early and value assets at a higher level than accountants in countries where conservatism is practiced. In both cultures, asset measurements and profit reports are more optimistic than conservative indicating that both cultures lean on the side of risk-taking. Still, American accountants tend to be even more optimistic than their Finnish counterparts.10

Another key aspect in the practice of accounting is the dichotomy between secrecy and transparency. Both Finland and the U.S. are transparent in financial reporting, with the United States being more transparent in how companies report and disclose financial information. Interestingly, societies demonstrating greater amounts of transparency in accounting culture are “societies where more emphasis is given to the quality of life, people, and the environment, will tend to be more open.”11

Fraud and Earnings Management. According to Transparency International, a global group that measures national corruption, fraud is very low in Finland compared to the U.S. Each year, Transparency International creates a Corruption Perception Index, where countries around the world are rated in terms of corruption and inequality. In 2013 when the Microsoft-Nokia merger was announced, Finland was given a rating of 89/100, whereas the United States was rated as 73/100.12 Scores approaching 100 indicate that a country is “very clean.”

Historically, Finland has had very little to no corruption. Since Microsoft acquired Nokia there has been no report of fraud or of earnings management on either side.

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