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ANALYSIS
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May 12, 2008 12:01 AM ET
THINKING BIG Among the potential moves for Microsoft CEO Steve Ballmer and CFO Chris Liddell: Buy TiVo, a text-messaging network, even SAP. Or they could start a price war with Google for Internet bids.
The decision could be crucial as Microsoft does battle with Google, Apple and, yes, Yahoo. Microsoft’s track record with regard to spending its cash has been mixed. The company did purchase Excel for $14 million, a steal considering the unbridled success of the software. But for every Excel or Great Plains software, there’s been a WebTV ($425 million in 1997) or a Hotmail ($400 million in 1997). Along the way, Gates & Co. have also missed out on some winners, including Quicken maker Intuit and Research in Motion, the Blackberry manufacturer. Another problem confronting Mr. Liddell—one that few CFOs have to deal with—is that to generate even a small boost in its top-line growth, Microsoft must buy companies that can bring in $5 billion or $6 billion in revenue. Such companies are not necessarily legion in the tech universe—or readily available for the taking. “There are very few $50 billion things that Microsoft can buy without facing an awful lot of scrutiny from the Department of Justice,” said Brian Skiba, a partner at the technology-focused investment banking firm Arma Partners. Microsoft has already formed alliances with AOL, as well as with social networking sites LinkedIn and Facebook (it owns a 1.6% stake in Facebook). But some observers believe the company’s management will refocus on its home entertainment offerings. Leveraging the industry-leading xBox video game platform by adding software to that hardware makes a lot of sense. Among the potential acquisition targets here are video game makers Electronic Arts or Take-Two, publisher of the wildly popular Grand Theft Auto series and itself a takeover target of EA’s. But as Stephen Smith, senior managing director at Arma Partners, observed, acquiring a video game maker is tricky for a hardware maker like Microsoft. “You can’t own [a video game studio],” Mr. Smith said, “or no one else will write programs for you.” Working at a huge corporation is rarely attractive to video game designers. Seven years after buying Halo creator Bungie Studios, Microsoft sold it back to its founders last year. “Bungie is like a shark,” founder Jason Jones explained at the time. “We have to keep moving to survive.” The experience may prompt Messrs. Ballmer and Liddell to seek out home entertainment targets that better fit Microsoft’s culture. The logical choice, said Mr. Smith, is set-top box specialist TiVo, since the xBox could serve as the hardware for TiVo’s television-recording software. “TiVo is the Apple of that category,” he said. “And Microsoft could buy it without antitrust concerns.” Opportunities exist for Microsoft outside the home as well. The company’s partnership with Ford Motor—which produced the in-car entertainment system Sync—proves that. Porting its software onto other mobile devices will prove lucrative—and tricky. Mr. Smith believes Microsoft might be able to acquire text-messaging network providers Acision and Airwide for a little over $1 billion combined. The purchases would help Microsoft build a platform to deliver its applications to cell phones, PDAs and other mobile devices. Certainly, Microsoft must do a better job delivering its software over the Internet. The company’s much ballyhooed online business unit has yet to live up to the hype. Meanwhile, hosted delivery of business applications (or Software-as-a-Service) has caught on big-time with corporate buyers. Even SAP, which some suggest is an intriguing target, reluctantly rolled out one such on-demand suite of business applications. Software vendors Intacct and NetSuite both offer hosted versions of ERP programs. An acquisition of either would dovetail with the company’s existing ERP products, Great Plains and Navision, which are on-premise applications. “Microsoft could focus on this area with a vengeance,” said Mr. Skiba, “and not worry about cannibalizing an existing business.” Others think it should dramatically counter Google in Internet advertising. One idea: Cut its rates to serve ads on MSN Live Search and Windows Live, essentially subsidizing the services. But Jared Kopf, founder of AdRoll, said “a price war [with Google] isn’t realistic,” noting that Microsoft could only engage in the tactic in display ads, while Google’s strength is in search ads. “Killing Google’s search revenue [from] ad words by dropping prices of display ads to zero might lose money for Microsoft, without harming Google.” Mr. Kopf argued that Microsoft’s best bet is to move beyond Google’s sphere, investing in entirely new advertising technologies. In any case, Messrs. Ballmer and Liddell need to get busy. “This is a battleship in a bathtub,” Mr. Skiba noted. “You can’t turn it around with a single deal.” FW
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