Microsoft and Nokia today announced that they had signed an agreement whereby Nokia will sell its Devices & Services business and license its patents to Microsoft for €5.4 billion. The transaction is expected to close in Q1 2014, subject to shareholder and regulatory approval.

The move will be seen as a key part of Microsoft's future devices and service strategy and was, perhaps, inevitable given its reliance on Nokia for Windows Phone devices, especially after rumours about such a transaction were floated earlier this summer. It will shake up both the Windows Phone ecosystem and the mobile industry more generally, drawing clear lines between major technology players, but also leaving questions about the business sustainability of smaller players.

The transaction will close the mobile phone chapter in Nokia's 150 year old history and reshapes a company that remains one of Europe's leading technology brands.

As a result of the transaction Microsoft will acquire "substantially all of Nokia's Devices & Services business". This includes the Mobile Phones (Series 40) and Smart Devices (Windows Phone) business units, Nokia's design team, operations including all Nokia Devices & Services production facilities, Devices & Services-related sales and marketing activities, and related support functions. Consequently, approximately 32,000 people are expected to transfer to Microsoft, including approximately 4,700 people in Finland.

This portion of the business generated approximately 50% of Nokia's net sales (€14.9 billion) in 2012. The transaction does not include Nokia's CTO (Chief Technology Office) organization, or patent portfolio, which will remain within the Nokia Group. 

However, as part of the transaction, Nokia will grant Microsoft a 10 year non-exclusive license to its patents and Microsoft will grant Nokia reciprocal rights related to HERE services. Further, Microsoft will have an option to extend this mutual patent agreement to perpetuity. of the transaction cost of €5.44 billion. €3.79 billion relates to the Devices & Services business, and €1.65 billion to the mutual patent agreement.

Microsoft will also become a strategic licensee of the HERE platform, paying Nokia for an initial four year license. The revnue stream for HERE will be equivalent to the internal revenue streams that Devices & Services currently transfer to the HERE and will be a key factor if maintaining the business viability of HERE.

Microsoft has also agreed to a 10 year license arrangement with Nokia to use the Nokia brand on current Mobile Phones products, but Nokia will continue to own and maintain the Nokia brand.  The Nokia brand will continue to be used on Series 30 and Series 40 products, but the indication are that Windows Phone products will switch to the Microsoft brand, although it seems likely the Lumia sub-brand will continue. 

Stephen Elop, from today, steps down as Nokia CEO and resigns from the Board of Directors. He will become Nokia's Executive Vice President Devices & Services. Marko Ahtisaari, Executive Vice President, Design; Jo Harlow, Executive Vice President, Smart Devices; Juha Putkiranta, Executive Vice President, Operations; Timo Toikkanen, Executive Vice President, Mobile Phones; and Chris Weber, Executive Vice President, Sales and Marketing will report to Stephen Elop, and, with the exception of Marko Ahtisaari, are expected to transfer to Microsoft when the transaction completes.

Stephen Elop said:

"Building on our successful partnership, we can now bring together the best of Microsoft’s software engineering with the best of Nokia’s product engineering, award-winning design, and global sales, marketing and manufacturing."

Once the transaction is complete, Nokia intends to focus on its three established business: NSN (networks), HERE (mapping and location services), and Advanced Technologies (technology development and licensing). The transaction is expected to strengthen Nokia's financial position and provide a "solid basis for future investment in these three businesses".

Risto Siilasmaa, Chairman of the Nokia Board of Directors and, following today's announcement, also Nokia interim CEO:

"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."

More on this story as it develops.