Post deal, the nature of the two companies will change - Nokia will be just a network equipment maker after it exits from the mobile-phone business it once dominated, while the world's largest software marker will move aggressively into hardware.
Nokia's Canadian boss Stephen Elop, who ran Microsoft's business software division before moving to Nokia in 2010, will now return to the US firm as head of its mobile devices business.
As part of the deal for Nokia's devices-and-services business, Microsoft will bring aboard 32,000 Nokia employees including Elop.
Elop is being considered a successor to Microsoft's retiring CEO Steve Ballmer, who is trying to remake the US firm into a gadget and services company like Apple before he departs, after disastrous attempts so far to compete in mobile devices.
Richmond-headquartered Microsoft will pay 3.79 billion euros for Nokia's devices unit and 1.65 billion euros for patents, according to a statement from the companies.
Nokia was Microsoft's closest partner in smartphones, with the ailing Finnish company one of the biggest supporters of Microsoft's phone software.
The deal strengthens Microsoft's entry in the key growth markets, including India, in mobiles and tablets, is expected to close in early 2014 subject to certain approvals.
Nokia shares jumped over 40 per cent on the Helsinki stock exchange following the announcement. Microsoft shares were marginally up 0.24 per cent in aftermarket trading on Nasdaq.

Analysts said the deal marks the US-based software firm's seriousness about expanding its influence in mobiles.  "This (deal) confirms that Microsoft is very serious about their phone business and they want to make sure that the ecosystem flourishes, including devices and apps," Gartner Principal Research Analyst Anshul Gupta said.
The deal is likely to give a tough competition to struggling Canadian smartphone maker BlackBerry, which was relegated to the fourth spot in global smartphone platform shipments in Q2 2013 by Windows OS.
Microsoft said Windows Phone has more than 10 percent share in nine markets and the platform outsells BlackBerry in 34 markets.
Commenting on the deal, Microsoft CEO Steve Ballmer said, "It's a bold step into the future – a win-win for employees, shareholders and consumers of both companies. Bringing these great teams together will accelerate Microsoft's share and profits in phones, and strengthen the overall opportunities for both Microsoft and our partners across our entire family of devices and services."
"Stephen Elop will be coming back to Microsoft, and he will lead an expanded Devices team, which includes all of our current Devices and Studios work and most of the teams coming over from Nokia, reporting to me," Ballmer said in a letter to Microsoft employees.
Post-deal Microsoft will have Nokia's phone business, its Qualcomm and other key IP licences, while, Nokia retains its telecom network equipment arm Nokia Solutions and Networks (NSN), mapping and location services (HERE), its CTO office and its patent portfolio.


Latest News from Business News Desk