Microsoft is buying Nokia's devices and services business - and getting access to the company's patents - for a total of $7.2bn in an effort to expand its share of the smartphone market.
The corporations announced the deal late on Monday, saying that Microsoft will pay $5bn for the Nokia unit that makes mobile phones, including its line of Lumia smartphones that run Windows Phone software.
Microsoft is also paying $2.2bn for a 10-year licence to use Nokia's patents, with the option to extend it indefinitely.
"We are very excited about the proposal to bring the best mobile device efforts of Microsoft and Nokia together," Steve Ballmer, Microsoft CEO, said in a memo to employees.
"We are receiving incredible talent, technology and IP [intellectual property]."
Microsoft said it was acquiring Nokia's Asha brand of low to mid-level smartphones and will license the Nokia brand for current Nokia mobile products.
Overseas cash resources
Microsoft, which is based in Redmond, Washington, said it would draw from its overseas cash resources to fund the transaction.
When the deal closes in early 2014, about 32,000 Nokia employees will transfer to Microsoft, the companies said.
Stephen Elop is to step aside as president and CEO of Nokia to become executive vice president of devices and services.
Risto Siilasmaa, Nokia's chairman, will stay in his current role and assume the duties of interim CEO.
Elop is expected to join Microsoft at the close of the transaction, along with several Nokia vice presidents.
Nokia plans to hold a news conference on Tuesday morning in Finland to discuss the deal.