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Microsoft Corporation (NASDAQ:MSFT) Writes Down $7.6bn Nokia Purchase

microsoft corporation (NASDAQ:MSFT)

Microsoft Corp (NASDAQ:MSFT) was in the news yesterday over its Xbox Ultimate Game Sale. Microsoft touted the ultimate game sale as plan to raise the interest of consumers in the Xbox platform. However, it was evident that the sale was indeed a sale to get as much Xbox-related items as possible out of the shelves as the firm continues to divest non-performing segments.

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The fact that Microsoft has been stripping the Xbox branding off its products speaks volumes about the ultimate plan to dispose the Xbox platform. New facts are emerging today in support of the assertion that Microsoft is indeed on a silent restructuring plan.

Update 9:48 EST: Microsoft writes down Nokia:

Microsoft revealed the terms of its cost cutting this morning just after the market opened on Wall Street. The firm said that it would write down the $7.6bn value of its purchase of Nokia and lay off 7,800 people, with most of those coming from the phone side of the business.

In an email to employees CEO Satya Nadella said “In the near-term, we’ll run a more effective and focused phone portfolio while retaining capability for long-term reinvention in mobility.” He said that Microsoft was “moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family.”

The rest of our article, which was written before the details of the write down and job cuts were revealed, is below.

New Job Cuts Set to be Announced Today

Nick Wingfield of The New York Times wrote a news article suggesting that Microsoft will announce new job cuts today. The piece says that sources at Microsoft are sure that the firm will lay off workers starting in its hardware group. The cuts will focus on those that came on board after Microsoft bought Nokia Corp last year. The new job cuts add to the 18,000 jobs that the firm said it would axe last year.

The news of the Microsoft job cuts shouldn’t really come as much of a surprise to people that are keeping tabs on the firm. At the end of June, Microsoft CEO, Satya Nadella has hinted that the firm will “make some tough choices in areas where things are not working and solve hard problems in ways that drive customer value “. Nadella gave that hint while he was unveiling Microsoft’s new mission statement to “to empower every person and every organization on the planet to achieve more”.

That statement, and the job cuts, has lead to renewed speculation that Microsoft might write down its acquisition of Nokia when it reveals its results for the June quarter. Microsoft paid $7.2bn for the firm, meaning that the coming write down could shock those looking for solid earnings this time around.

Microsoft has announced a string of cost-cutting moves in the last one year. The firm is laying off 18,000 workers, it sold its online display ad business to AOL, it is on track to divest the Xbox, and now new jobs are on the line.

In April Microsoft warned of  an “elevated risk of impairment” at the mobile division.

There’s A Limit to the Cost that You can Cut

A firm can increase its profit margins by either increasing its revenue or reducing its costs. Reducing costs often brings quick returns but there’s only so much cost-cutting you can do before you start killing the firm.

Microsoft used to be one of the top tech firms in the world as its Windows OS rewrote the history of personal computing. The firm is still considered a bluechip stock in investment circles especially among value investors, but it has lost its innovative edge. Innovation is the key word that drives momentum and momentum drives growth.

Hence, when a firm is not innovating and growing, it will most likely start a journey to its demise. The problems facing Microsoft are similar to the problems facing BlackBerry, Yahoo, and maybe IBM. They ignored the power of mobile and now they are paying dearly as Apple and Google continues to take the lead.

The problems for Microsoft are in hardware, and the firm’s software business is still doing well. The losses from Nokia and Xbox still matter, however.

It remains to be seen if Microsoft will be able to reposition itself, but it seems that Satya Nadella knows exactly where he is taking the firm. It is left for the world to make way for a man that knows where he is going and not afraid to make tough choices.

 

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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