Microsoft to buy Nokia's phone business for $7.2 billion

Former Nokia CEO Steven Elop (left) and Microsoft CEO Steve Ballmer formed a partnership two years ago. Now Microsoft is buying Nokia's phone business outright.
NEW YORK (CNNMoney)
Microsoft announced late Monday night that it will buy Nokia's mobile phone business -- a momentous deal that pits Microsoft squarely against Apple and Google in the hotly contested smartphone arena.
The €5.4 billion ($7.2 billion) acquisition gives Microsoft control of the second-largest mobile phone manufacturer in the world, according to IDC. The Finnish Nokia (NOK) is well behind Samsung in cell phone sales but far ahead of third-place Apple (AAPL, Fortune 500), according to IDC.

Yet Nokia is a deeply troubled company and is rapidly losing relevance.

That's particularly true in the smartphone market that Microsoft (MSFT, Fortune 500) covets. Nokia, once dominant in the sector, no longer cracks the top five manufacturers in the world.

Sales of Nokia's top-of-the-line Lumia smartphones are growing fast, but they're coming off such a low baseline that the phones still remain largely irrelevant compared to iPhone, Samsung Galaxy S4 and even Google's new Moto X, which have all captured more buzz.

Apple and Google (GOOG, Fortune 500) control 86% of the smartphone market, while Microsoft's Windows Phone operating system has just a 3.7% share.

In its strategic rationale for the deal, Microsoft said it cannot cede complete control of the smartphone phone market to Google and Apple, allowing its rivals to "foreclose app innovation, integration, distribution or economics."

"We are very excited to bring the best mobile device efforts of Microsoft and Nokia together," Steve Ballmer, Microsoft's outgoing CEO, said at a press conference in Finland. Ballmer characterized the deal as a "win-win" for both companies. Nokia shares spiked more than 45% in Helsinki trading.