Microsoft has reached an agreement to acquire the handset and services business of Nokia for about $US7.2 billion ($8 billion), in an audacious effort to transform Microsoft's business for a mobile era that has largely passed it by.
About 32,000 Nokia employees will join Microsoft as a result of the all-cash deal, which will turn the Finnish mobile phone pioneer into the engine for Microsoft's mobile efforts.
Stephen Elop, the former Microsoft executive who was running Nokia until the deal was signed, will rejoin the US software groups, setting him up as a potential successor to Microsoft chief executive Steven Ballmer, who has said he will retire within a year.
"This agreement is really a bold step into the future for Microsoft," Mr Ballmer said. "We're excited about the talent capabilities it will bring to Microsoft."
Nokia was once the mightiest company in the mobile phone business, but lost its way as the industry shifted to the era of the smartphone. Samsung and Apple divide nearly all the profits in the global smartphone business now.
The deal is something analysts have speculated about for years, after Mr Elop joined Nokia and signed a pact with Microsoft in 2011 to standardise on the software company's Windows Phone operating system.
The fortunes of the two companies have become closely intertwined since that agreement, but it has done little to turn either company into a leader in the mobile business. Windows Phone accounted for only 3.7 per cent of smartphone shipments in the second quarter, technology research firm IDC says.
Nokia remains the second-largest shipper of mobile phones in the world after Samsung, but that is largely because of lower-end feature phones, from which consumers are moving away. Nokia is no longer among the top five makers of smartphones.
A big question is whether Microsoft and Nokia will succeed as one company where they have not as close partners. Mr Ballmer said Microsoft and Nokia had not been as agile separately as they would be be jointly, and cited how development could be slowed down when intellectual property rights were held by two different companies.
Gartner analyst Carolina Milanesi believes the deal could help the companies respond more quickly to the dynamism of the mobile market. "They need to move faster," she said.
Large acquisitions are fraught with peril, especially in the technology business, where there are challenges in integrating employees from different backgrounds into a coherent whole.
The Nokia deal echoes Google's $US12.5 billion deal to acquire Motorola Mobility, which gave it control of a trove of mobile patents and a handset business that has yet to shine under Google's ownership.
Microsoft will pay $US5 billion for Nokia's devices and services business and $US2.18 billion to license its patents. After it sells its handset operations, Nokia will be left with three primary businesses: network infrastructure and services; mapping and location services; and a technology development and licensing unit.
The company will continue to do business as Nokia, licensing the Nokia name to Microsoft for use on its mobile phones for 10 years. "For Nokia today, it's a moment of reinvention," Nokia board chairman Risto Siilasmaa said.
Mr Siilasmaa also assumed the title of interim chief executive.
For Microsoft, there is also an attractive financial dimension to the deal. Because Nokia is based in Finland, Microsoft can use a portion of its foreign-held cash to pay for the acquisition, allowing it to avoid hefty taxes it would otherwise pay to bring the cash back to the US. It took a similar approach when it acquired Skype.