Microsoft Corp. (Nasdaq: MSFT) agreed to buy Nokia Oyj’s handset unit and license its patents for 5.44 billion euros ($7.2 billion), seeking to revive two smartphone businesses that have struggled for a half-decade to gain share against Apple Inc. and Google Inc.

The devices and services unit, which accounted for half of Nokia’s 2012 revenue, along with 32,000 employees, will transfer to Microsoft, the companies said. Nokia Chief Executive Officer Stephen Elop, 49, will return to Microsoft after a three-year stint running the Finnish manufacturer. The move stoked speculation he may be a successor to CEO Steve Ballmer, who said last month he’d retire within 12 months.

Nokia shares jumped as much as 48 percent in Helsinki as the sale removes a drag from losses in handset making and turns the company into a network-equipment supplier. For Microsoft, the purchase marks its biggest foray into hardware as sliding personal-computer sales threaten demand for the Windows operating system that made it the largest software maker.

“The question is whether combining two weak companies will get you a strong new competitor: it’s doubtful,” said Paul Budde, a telecommunications consultant in Sydney. “Both Nokia and Microsoft really missed the boat in terms of smartphones, and it is extremely difficult to claw your way back from that.”

Market-Share Decline

Nokia, based in Espoo, Finland, racked up losses of more than 5 billion euros over nine quarters as Elop’s comeback efforts failed to eat into the dominance of Apple and Google’s Android platform in the smartphone market. The stock has lost more than 80 percent in the five years through yesterday.

The shares rose 42 percent to 4.22 euros at 2:47 p.m. in Helsinki, valuing Nokia at 15.8 billion euros. That compares with a $278 billion market capitalization for Redmond, Washington-based Microsoft. Its shares fell 3.8 percent to $32.13 in early U.S. trading.

As part of the agreement, Microsoft will pay 3.79 billion euros for Nokia’s devices division and 1.65 billion euros for patents, according to a statement from the companies. The all- cash transaction, subject to Nokia investors’ approval, is expected to be completed in the first quarter of 2014.

Nokia said it will book a gain of 3.2 billion euros, with the sale “significantly” accretive to earnings. It also said it aims to return its debt, which is ranked junk by all three major rating companies, to an investment grade. Chairman Risto Siilasmaa, who will become Nokia’s interim CEO, said the company may return excess capital to shareholders.

‘Big Transformation’

“It’s a big transformation, but that’s what you’ve got to do in the tech business to move forward,” Ballmer told Tom Keene on Bloomberg Television’s “The Pulse.”

The Microsoft purchase is the second major deal to be announced during the U.S. Labor Day holiday yesterday. Verizon Communications Inc. agreed to pay $130 billion for Vodafone Group Plc’s stake in their U.S. wireless venture in the biggest transaction in more than a decade.

The Microsoft-Nokia deal is the largest for a wireless device maker after Google’s purchase of Motorola’s handset unit in 2012, according to data compiled by Bloomberg. For Microsoft, the deal including the payment to license Nokia’s patents is its second-biggest behind the $8.5 billion purchase of Internet telephone company Skype in 2011.

Microsoft agreed to pay about 0.35 times annual revenue, compared with the median of about 1.4 times for 60 wireless equipment-maker deals tracked by Bloomberg. That also compares with the 0.77 times revenue Google paid for Motorola Mobility, the data show.

Google paid about 1.3 times annual operating income for the handset maker, while Nokia’s device and services business reported an operating loss last year, according to the data.

After BlackBerry

With the latest sale, the original pioneers in the mobile- phone industry -- Motorola, Nokia and Ericsson AB -- have all ceased to be independent handset manufacturers or given up on the business. BlackBerry Ltd. said last month it’s considering putting itself up for sale. Its shares advanced 4.2 percent to $10.50 in early U.S. trading.

Meanwhile, Microsoft becomes the last major developer of smartphone operating systems to get into manufacturing. Apple makes its own handsets, which use its iOS operating system. Google’s acquisition of Motorola Mobility gave it its own lineup of phones.

Microsoft’s other recent significant move into hardware -- the Surface tablet -- has trailed expectations and the company wrote down inventory last quarter.

To break even on an operating basis, Microsoft will need Nokia to sell about 50 million smartphones a year, it said in a presentation. Nokia has a run-rate of about 30 million units. In the second quarter, Nokia sold 7.4 million smartphones under the Lumia line.

10-Year License

Microsoft acquired the Lumia brand to use with smartphones, while it will license the Nokia brand to use with low-end phones for 10 years, Elop said at a press briefing today. Microsoft will later decide what to call its future smartphones.

Microsoft will face a balancing act owning Nokia and keeping its other hardware partners, including HTC Corp. and Samsung Electronics Co., committed to its Windows Phone. Aiming to reassure other phone makers that Microsoft will still support them, Ballmer said that the company was “100 percent” committed to helping its manufacturing partners.

Ballmer declined to say whether Elop would become CEO, or had been a candidate to succeed him.

Microsoft Tie-Up

Ballmer called Nokia’s Siilasmaa shortly after the new year to initiate discussions on an acquisition and the two met in February at the Mobile World Congress in Barcelona, according to Microsoft. Talks heated up in recent months and a deal was lined up before Ballmer announced his retirement last month, the company said.

Microsoft and Nokia have had a close relationship through Elop, who had run Microsoft’s Office unit. He left the software maker in September 2010 to take the top job at Nokia.

At the time, Elop likened Nokia’s position to a man standing on a burning oil platform on the verge of being engulfed in flames, facing the option of staying aboard or jumping to the ocean to have a chance to survive.

In February 2011, Elop struck a deal with Ballmer to switch Nokia’s smartphones from its own Symbian operating system to Windows Phone. In exchange, Microsoft ponied up more than $1 billion dollars to pay for Nokia marketing and developing products on Windows.

Nokia had the largest share of the mobile phone handset market until it was overtaken by Samsung in 2012, according to data compiled by Bloomberg.

Losing Share

Still, Nokia remains a top seller of traditional mobile phones -- models that are more popular in developing markets. In total shipments, the company ranks second to Samsung among device manufacturers. Samsung accounted for 26 percent of shipments last quarter, while Nokia had 14 percent. Apple came in third with 7.2 percent.

After the sale to Microsoft, Nokia’s biggest business will be network equipment, which it recently fully took over from Siemens AG and renamed Nokia Solutions and Networks. The unit competes with Ericsson, Alcatel-Lucent as well as China’s Huawei Technologies Co. and ZTE Corp.

Ericsson jumped 3.8 percent to 81.60 kronor in Stockholm. Alcatel-Lucent, which under new CEO Michel Combes is streamlining its business, added 9.2 percent to 2.20 euros in Paris trading.

Nokia said it will also keep its mapping and location services unit, called Here, and its technology development and licensing division.

“Nokia has a highly evolved device design and manufacturing process which will benefit Microsoft greatly,” said Al Hilwa, an analyst at research firm IDC. “This is simply the fastest path in front of Microsoft to achieve something like Apple’s vision on devices.”

JPMorgan Chase & Co. advised Nokia on the transaction and Goldman Sachs Group Inc. worked with Microsoft.

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