Microsoft bought Nokia’s handset division thinking it could use the company’s considerable hardware talent to build phones capable of going head-to-head with the iPhone. It was clear at the time of the deal that this was never going to happen and that’s why we weren’t surprised to see that Microsoft last month was forced to eat a $7.6 billion writedown related to the deal. But now TechCrunch has taken a look at some of the numbers Microsoft posted in a recent filing with the Securities and Exchange Commission that reveal the Nokia deal was an even bigger disaster than we realized.
Here, for instance, Microsoft bluntly describes the total sales failure for its new hardware unit:
In the second half of fiscal year 2015, Phone Hardware did not meet its sales volume and revenue goals, and the mix of units sold had lower margins than planned.
And here Microsoft discloses the massive drop in the hardware business’s total goodwill from the time it closed the deal to the time it decided to take a writedown:
Our annual goodwill impairment test as of May 1, 2015 indicated that the carrying value of Phone Hardware goodwill exceeded its estimated fair value. Accordingly, we recorded a goodwill impairment charge of $5.1 billion, reducing Phone Hardware’s goodwill from $5.4 billion to $116 million, net of foreign currency remeasurements, as well as an impairment charge of $2.2 billion related to the write-down of Phone Hardware intangible assets.
As TechCrunch notes, that drop in goodwill represented a shocking 97%+ loss in value.
For those of you who have never taken accounting, goodwill is the premium that one company pays to acquire another company in excess of its basic book value. It’s an intangible asset that places a dollar value on a company’s brand power, its patents and other intellectual property, and the size of its customer base, among other things.
Estimating goodwill is always an inexact science but typically companies don’t overestimate it by 97%, which basically means the Nokia handset division’s brand reputation and IP value disintegrated the minute Microsoft bought it.
But hey, it wasn’t bad for everyone: Former Nokia CEO Stephen Elop made out like a bandit.