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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Bloomberg
$100B MAN Steve Ballmer may skip buybacks and use the cash on acquisitions to keep Microsoft growing in a Web-oriented world.
November 5, 2007 12:01 AM ET
In San Francisco last month, at an annual gathering of high-tech start-ups and new media behemoths known as the Web 2.0 Summit, Microsoft CEO Steven A. Ballmer stunned a standing-room-only crowd when he declared that the giant—and now elder statesman—of the software industry would acquire 20 companies a year for each of the next five years, and spend as much as $1 billion a pop to get them. With typical Ballmer bombast, he announced his e-mail address (steveb@microsoft.com) so anyone could write to him, as he put it, “if you have something you want to sell.” The audience roared. Tech bloggers went wild. Word of Microsoft’s plans was soon all over the Web. It was the dollar signs that got them: 100 companies in five years for $100 billion. Not many corporations could manage such a binge. Microsoft, with more than $23 billion in cash or short-term investments sitting on its balance sheet ready to be spent, is one that can afford it, and with relative ease. Less than a week later, Mr. Ballmer refreshed the buzz when he made good on his promise with an extremely high-profile first installment, closing a much-rumored investment in the burgeoning social networking site Facebook. Microsoft paid $240 million for a 1.4% stake, a deal that values the three-year-old tech tot at $15 billion. Mr. Ballmer’s Five Year Plan suddenly looked very real. The new strategy is an obvious boon to investors and founders of other technology companies, but it leaves two nagging questions: Why now? And why the sense of urgency that is implied by the pace and scale of the proposed purchases? It also suggests a third question: Was this a tacit admission that Microsoft is behind the pacesetters in three of Web 2.0’s dominant categories: search (Google), social networking (Yahoo, News Corp.’s MySpace) and online advertising (Facebook, which, while a social network, is considered to be Microsoft’s Trojan horse here)? Wall Street has long pooh-poohed Mr. Ballmer’s repeated claims that his $51 billion in annual revenue shop—the one that invented the software industry—should still be viewed as a growth company. In this context, Mr. Ballmer’s appetite to buy new technologies from others looked like one more piece of evidence making the case that an aging Microsoft, now 32 years old, was losing its ability to grow its businesses organically. For the last couple of years, it sure seemed as if Microsoft needed a kick in the pants. Besides missing the first Web 2.0 boat, Microsoft delayed the release of its much-awaited Vista operating system repeatedly; its stock was flat; its online and entertainment divisions were still losing money; and the company seemed mired in regulatory contests in Europe. But it turns out Microsoft isn’t having trouble growing. In late October, Mr. Ballmer wowed his audience again, this time on Wall Street, delivering earnings for the fiscal first quarter of 2008 that were better than anything since 1999. Revenue and earnings per share grew 27% and 25%, respectively, for the quarter ended Sept. 30. It was “the fastest revenue growth of any first quarter since 1999,” Microsoft CFO Chris Liddell said in an earnings release. Most of this was due to growth of the Windows and Office operating systems, still Microsoft’s core businesses. But the September release of Halo 3—which broke video game records—helped push Microsoft’s entertainment and devices divisions into the black too. It was “an outstanding start” to the fiscal year, Mr. Liddell added, proving that in terms of growth, Microsoft can defy “the law of large numbers.” So what need does the company have for the so-called Five Year Plan? M&A is hardly unknown at headquarters in Redmond, Wash. While Microsoft’s deal-making activities, like those of other companies, slowed after the corporate venture capital boom died with the Internet bubble, the company has since stepped up the pace. According to 10-K filings, Microsoft spent at least $650 million to acquire 21 companies in fiscal 2006, compared with $200 million on nine deals the year before. In fiscal year 2007, which ended June 30, Microsoft did another 19 deals worth $1.2 billion. Since August, the software company spent more than $6 billion, including the investment in Facebook. All told, as Mr. Ballmer explained to analysts in July, the company has bought 80 companies in the past five years. (Not all these deals are made public. Given Microsoft’s size, any acquisition worth less than about $500 million isn’t material to earnings, and therefore, needn’t be disclosed.) “A lot of our great products and people have come, foundationally, from M&A,” Bruce Jaffe, Microsoft’s vice president for corporate development, pointed out in an interview with Financial Week. “Hotmail, PowerPoint, Visio; even Halo, which we got through Bungie Software [purchased in June 2000]. So M&A has been an important part of our growth strategy for a very long time.” Not that the company has always been a successful deal-maker. In the 1990s, Microsoft’s strategy, in part, often saw it initiate courtships with Silicon Valley start-ups only to back off and later release products of its own that were eerily similar to those of its former acquisition candidates. That added to the ire of federal regulators, who ultimately tried but failed to break up the company. But the renewed emphasis on M&A makes a lot of sense to securities analyst Brendan Barnicle of Pacific Crest Securities, a technology-focused boutique bank in Portland, Ore. “Microsoft is taking the cash that it has and using it again,” Mr. Barnicle explained. From about 2000 to 2005, the company used its cash hoard to issue bigger dividends and fund stock buy-backs. That didn’t spur growth, so Mr. Ballmer has gone back to the earlier battle plan. “He’s saying, ‘Where we can’t grow ourselves, we’ll buy our way in,’” Mr. Barnicle said. “I think that’s the right strategy. And what’s new here is Ballmer’s emphasis on acquisition in the online business [unit], specifically.” Online is the only one of Microsoft’s five operating units that isn’t profitable. Indeed, the division reported an operating loss of $264 million in the first quarter of 2008. Microsoft fumbled early forays into the Web world—practically missing the browser market, starting late in search and online advertising and then failing to leverage its huge installed base of customers “on the desktop” with its content portal MSN. “Microsoft is very outstanding at building software,” Mr. Barnicle said, “but on the Web what you’re building is different: community, creating attractive content, drawing users to a site—these aren’t Microsoft’s strengths.” Meanwhile, Mr. Ballmer has said that online advertising could represent as much as 25% of Microsoft’s business 10 years from now. Given Microsoft’s scale and track record in the space, that’s not possible to achieve through organic growth alone. But the Five Year Plan will not be easy. “What could trip them up is the challenge of how they will keep the users,” said Mr. Barnicle. Almost as soon as News Corp. bought MySpace for $580 million in 2005, corporate advertising appeared on the site and MySpace’s young users began leaving—many of them migrating to Facebook. As for what’s next, Mr. Jaffe would only speak generally about how he and his team will execute Mr. Ballmer’s plan. “What we’ve been buying,” he said, “is a good signal to what we will be buying.” Roughly, this means Microsoft will do about one-third of its annual transactions in online services and more than one-third in the server and tools businesses, to support its enterprise business (think security companies like FrontBridge Technologies, acquired in July 2005, or Whale Communications, bought in May 2006). The rest of the buying will be in emerging fields like health care (MedStory, 2007) and global devices. “We’re looking everywhere,” said Mr. Jaffe. “There is no acquisition too large or too small.” This is a strategy that Microsoft remains uniquely positioned to execute. The company still has nearly six times the free cash flow of Google, its biggest threat for market dominance, and fully 26 times the free cash flow of the original new media company, Yahoo. But now that Microsoft isn’t the only giant plying the 21st-century consumer software space, it does seem to be taking a less cunning, even self-effacing strategic line: “If you’re out there looking for an investment or looking to sell,” said a company spokesperson, “don’t forget about us.” FW
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