Microsoft could announce a write-off of a big part of its 2013 Nokia acquisition as early as Wednesday.
The write-off was first signaled in late April, when Microsoft warned investors that the smartphone division was at an "elevated risk of impairment."
"Impairment" is a term used to describe the situation when the market value of a business is less than what's carried on the books. In such scenarios, corporations are required to balance accounts by taking a non-cash charge to the tune of the difference.
"Declines in expected future cash flows, reduction in future unit volume growth rates, or an increase in the risk-adjusted discount rate used to estimate the fair value of the Phone Hardware reporting unit may result in a determination that an impairment adjustment is required, resulting in a potentially material charge to earnings [emphasis added]," the company stated in an April 23 filing with the U.S. Securities and Exchange Commission (SEC).
The Nokia acquisition was one of the last moves made by former CEO Steve Ballmer, who stepped down in February 2014. The deal, revealed the previous September, has been both acknowledged by analysts as necessary to remain a player in mobile, and criticized for its inability to improve Microsoft's fortunes in the smartphone market.
Current CEO Satya Nadella was reported to have opposed the acquisition.
The last time Microsoft wrote off a big chunk of an acquisition was in mid-2012, when it took a $6.2 billion charge related to the purchase five years before of aQuantive. Microsoft bought the online marketing company for $6.3 billion, at that time its largest-ever deal.
Ironically, on Monday Microsoft effectively exited the online advertising business -- with the exception of ads placed in its Bing search results, which it will continue to sell -- by striking a deal with AOL.
AOL will assume all sales responsibilities for display, mobile and video ads in the U.S. and eight other markets, including the U.K., Canada, Germany and Japan. Some 1,200 employees in Microsoft's advertising group will be offered jobs at AOL, according to reports by Bloomberg and the Wall Street Journal (subscription required).
In return, AOL will make Bing the default search engine across its sites, including the Huffington Post and TechCrunch, and evict Google.
The Nokia write-down could be made public with a filing to the SEC as early as Wednesday, the first business day after the end of Microsoft's fiscal year, which runs through June 30.
In 2012, Microsoft announced the $6.2 billion charge related to the aQuantive acquisition on July 2, also the first business day after the Redmond, Wash. company closed its fiscal year.
While a write-off of goodwill is a non-cash accounting maneuver -- no dollars are actually burned -- it is an admission of a mistake, typically that the firm overpaid for what it purchased.
It's not known how much of a write-down Microsoft will take, as companies have some flexibility in how they account for such balance-the-books moves. Three years ago, Microsoft had $6.4 billion of goodwill related to the aQuantive acquisition before it wrote down 97% of that.
In its April 2015 filing, Microsoft said it carried $5.5 billion in goodwill from the Nokia deal, as well as another $4.5 billion in intangible assets. Because "goodwill" is the difference between the purchase price and the actual assets, tangible or otherwise, the $5.5 billion, or something close to it, would be the likeliest number.
If Microsoft does write off the majority of the Nokia purchase -- which ultimately cost it $7.9 billion by the time the deal closed in the first half of 2014 -- it would be but the latest move by the company to recast the acquisition. Just two weeks ago, Nadella announced the departure of Stephen Elop, the former chief executive of Nokia who rejoined Microsoft last year. He also unveiled a restructuring of the company's engineering groups that put devices, Elop's bailiwick, under the purview of Terry Myerson, who before that led only the operating system division.
Also out: Jo Harlow, a former Nokia executive who came with Elop to run Microsoft's phone business.
A Nokia write-down would also fit with Nadella's warning last week that "tough choices" face Microsoft. In an all-hands email, Nadella said, "We will need to innovate in new areas, execute against our plans, make some tough choices in areas where things are not working and solve hard problems in ways that drive customer value [emphasis added]."
Few analysts believe that Microsoft will actually shut down its smartphone group or quit manufacturing handsets, in large part because of the resources poured into making Windows 10 for a range of devices, and its developer-aimed pitch to craft "Universal" apps and port those on Android and iOS to Windows 10 Mobile.
Microsoft will hold its next quarterly earnings call with Wall Street on July 21 starting at 2:30 p.m. PT.
This story, "Microsoft could write off billions on Nokia deal as early as Wednesday" was originally published by Computerworld.