Updated 2:55PM -- Microsoft Corp. is buying Nokia Corp.'s line-up of smartphones and a portfolio of patents and services in an attempt to strengthen its fight with Apple Inc. and Google Inc. to capture a slice of the lucrative mobile computing market.
The 5.44 billion euros ($7.2 billion) deal announced late Monday marks a major step in the company's push to transform itself from a software maker focused on making operating systems and applications for desktop and laptop computers into a more versatile and nimble company that delivers services on any kind of Internet-connected gadget.
"It's a bold step into the future -- a win-win for employees, shareholders and consumers of both companies," Microsoft CEO Steven Ballmer told reporters at Nokia's headquarters in Finland Tuesday. "It's a signature event."
Microsoft hopes to complete the deal early next year. If that timetable pans out, about 32,000 Nokia employees will transfer to Microsoft, which currently has about 99,000 workers.
The proposed price consists of 3.79 billion euros ($5 billion) for the Nokia unit that makes mobile phones, including its line of Lumia smartphones that run Windows Phone software. Another 1.65 billion euros ($2.2 billion) will be paid for a 10-year license to use Nokia's patents, with the option to extend it indefinitely. Exiting CEO Steve Ballmer said that Microsoft will invest more than $250 million in a new data center to serve European consumers.
The deal with Nokia represents the second most expensive acquisition in Microsoft's 38-year history, ranking behind an $8.5 billion purchase of Internet calling and video conferencing service Skype. Tony Bates, who ran Skype, is also regarded as a potential successor to Ballmer.
Investors in Nokia welcomed the deal, sending shares in the company up more than 40 percent to 4.15 euros in Helsinki.
Nokia, based in Espoo, near the Finnish capital, and Microsoft have been trying to make inroads in the smartphone market as part of a partnership forged in 2011. Under the alliance, Nokia's Lumia smartphones have run on Microsoft's Windows software, but those devices haven't managed to compete with iPhone or the array of Android-powered devices spearheaded by Samsung Electronics' smartphones and tablets.
"Until there are signs that (Microsoft) can innovate and successfully execute in the post-PC era, we expect the stock to languish at current levels," said Janney analysts Yun Kim and Alice Hur. "We do not believe the planned acquisition of (Nokia's) mobile business changes (Microsoft's) strategic positioning in the smartphone market."
Microsoft's shares fell $2.05, or 6.1 percent, to $31.35 in midday trading in the U.S.
Microsoft, based in Redmond, Wash., has been racing to catch up with customers who are increasingly pursuing their digital lives on smartphones and tablet computers rather than traditional PCs. The shift is weakening Microsoft, which has dominated the PC software market for the past 30 years, and empowering Apple Inc., the maker of the trend-setting iPhone and iPad, and Google Inc., which gives away the world's most popular mobile operating system, Android.
Microsoft is now betting it will have a better chance of narrowing the gap with its rivals if it seizes complete control over how mobile devices work with its Windows software.
But speaking to investors and analysts later Tuesday, Ballmer admitted that the company still has to play catch-up with the likes of Apple and Android.
"We know we need to accelerate. We're not confused about that," he said.
Neil Mawston from Strategy Analytics said the move was good for Nokia's shareholders but did not change much for the ailing Finnish firm which has lost significant market share.
"Nokia is still heavily dependent on Microsoft's software capabilities and Microsoft continues to lag the market like it has done in the last few years," Mawston said. "Not much will change whether Nokia is inside or outside the Microsoft portfolio."