Remember the Red Ring of Death?
Barely a year after Microsoft paid $9.5 billion for Nokia’s handset unit, the company says it has lost $7.6 billion of that value. That’s equal to about 95 percent of what Microsoft paid for the assets, excluding the cash that came with them. Along with ahefty writedown, Microsoft plans to cut as many as 7,800 jobs, many of them related to the purchase of the Finnish mobile phone maker.
Horrifying as this deal may sound in retrospect, it’s neither the biggest writedown for Microsoft by size nor its largest destruction of value. We’ve put together a list breaking down four of the most costly charges in the company’s history.
But first, it’s worth noting that between the blunders have come some truly brilliant deals. A 2007 investment of $240 million in Facebook valued the company at $15 billion then. The social networking giant now has a market cap of more than $240 billion. The 2000 acquisition of Bungie, which brought Halo to the Xbox, was made for an undisclosed amount, reported at the time to be in the tens of millions. The franchise has become the foundation for its Xbox console and has brought in more than $4 billion in sales. And then there’s PowerPoint, which Microsoft obtained in the $14 million purchase of Forethought in 1987. PowerPoint may be the bane of many office workers’ existence, but it’s a linchpin of Microsoft’s lucrative Office business.
The Nokia acquisition was one that Steve Ballmer, the former chief executive officer at Microsoft, pursued over the initial rejection of his board and protests from several of his top executives, people familiar with the matter said last year. Satya Nadella, the current CEO, was among those who opposed the purchase. Now that Nadella has his say, he needs a lot more deals that look more like Bungie and Facebook, and less like the list below.
1. Bubbly investments in the dot-com era
During the frenzy of the late-1990s and early 2000s, Microsoft made a series of bad bets that added up to an exceedingly big number. After taking a $5 billion stake in AT&T as well as investments in European telecom providers, Microsoft took $9.1 billion in impairments during its fiscal 2001 and 2002. Chasing Internet and cable glory in the bubble years, Microsoft had poured billions into companies planning to hawk broadband services, interactive television, and satellite, many of which went belly up or were massively scaled back. When the dust cleared, Microsoft’s portfolio was worth little, and the chastened company was much more careful with where it took stakes.
Biggest destruction of value? The 2012 writedown of Internet advertising company AQuantive saw Microsoft’s $6.3 billion purchase in 2007 practically evaporate. Thecharge totaled $6.2 billion, or 98 percent of the acquisition price. At least that decline in value took five years. Nokia wins for the speediest.
3. Xbox 360’s Red Ring of Death
Microsoft wrote down more than $1 billion in 2007 associated with Xbox 360 warranties. The machines had become afflicted with what became known as the Red Ring of Death, which rendered the hardware effectively useless.
Malfunctioning video game consoles wasn’t the only hardware writedown for Microsoft. In 2013, the company took a $900 million charge for unsold inventory of its Surface tablets. Computer-wielding dancers weren’t enough to save this product.