Interesting article from the WSJ:
January 7, 2000
Microsoft Is Making a Big Name
For Itself in Acquisition Game
By NIKHIL DEOGUN and KARA SCANNELL
Staff Reporters of THE WALL STREET JOURNAL
Microsoft Corp. has always had a reputation as an aggressive competitor.
Now it is making a name for itself as an aggressive deal maker.
The software maker said it completed 90
investments or acquisitions valued at $9.88
billion last year, including 71 equity
investments, 14 acquisitions and five joint
ventures. The deals last year ranged from a well-publicized $5 billion
equity investment in AT&T Corp. to the small acquisition of CompareNet
Inc., a comparison-shopping service on the Internet.
It makes Microsoft, which had a cash hoard of $18.9 billion in its fiscal
first quarter ended Sept. 30, one of the most active corporate buyers or
financiers of companies -- and makes the company a giant portfolio
manager. Just a few hot picks in the Microsoft mutual fund: Apple
Computer Inc., Comcast Corp., Nextel Communications Inc. and Akamai
Technologies Inc. At the end of September, Microsoft reported that its
equity and other investments, which mostly reflect the value of its equity
stakes, had a market value of $14.9 billion.
To a large extent, Microsoft's buying binge underscores the company's zest
for making strategic investments. At the same time, Microsoft is a very
attractive would-be investor for telecommunications and high-tech
companies. Microsoft has been embroiled in a federal antitrust trial for
more than a year; most of its recent acquisitions haven't been of the sort to
attract the type of government opposition that scuttled its purchase of Intuit
Inc. in 1995.
Microsoft has
made
acquisitions
and
investments for
some time, but
its past deals
seemed more
focused on
acquiring
software
technology that
was needed to
fill holes. The
company's
recent deals
appear to be designed to position the company to enter new markets, such
as communications.
But as they like to say in Silicon Valley, it's not about the money. A
Microsoft spokeswoman notes that the acquisitions aren't "financially
driven."
Indeed, in July 1999, Greg Maffei, Microsoft's chief financial officer at the
time, noted in a presentation to analysts that "I don't think in my tenure at
Microsoft I can remember doing an accretive acquisition." Microsoft's
deals are "always dilutive in the short term."
They are engineered, he said, "first and foremost because there is a benefit
to the company in building the strategic relationship with the investee
company, or benefit to the company, we believe, in making the acquisition
for the long-term strategic, and hopefully, economic gain to the company."
That said, the performance of some investments in the Microsoft portfolio
are hardly shabby. Consider this: Microsoft's initial $600 million investment
in Nextel, announced in May 1999, is now valued at $1.67 billion. In
August 1997, the company plowed $150 million in Apple when Apple's
stock was at about $15. At the 4 p.m. close of Nasdaq Stock Market
trading Thursday, Apple stood at $95, down $9.
Similarly, the company invested $1 billion in Comcast in June 1997, when
cable stocks were in the doldrums and Comcast was trading at about $9
-- at 4 p.m. on Nasdaq Thursday it was at $43.75, up $1.625. And the
company made a killing with its investment in UUNet Technologies, an
Internet-backbone operator now part of MCI WorldCom Inc. Mr. Maffei
has estimated that the $4 million investment, followed by the exercise of
$12 million in warrants, turned into a stake valued at "well in excess" of
$500 million.
Then there is a slew of investments, many in companies building broadband
networks, that Microsoft has made in companies just before they go
public. For instance, Microsoft invested $500 million in NTL Inc., a
cable-television carrier in Europe. The stock, which was about $63 the
day of the announcement, stood at $109.75, down $3.75, at 4 p.m. on
Nasdaq Thursday.
Another big win for Microsoft was its $15 million investment in Akamai
Technologies, an internet content-delivery service, in September. Akamai
went public in late October, and its stock has risen more than 800%. Most
of Microsoft's gains are unrealized as its investments are often in the form
of convertible preferred stock.
Getting an exact market value or return on Microsoft's investments is
difficult. At the analysts' meeting over the summer, Mr. Maffei, who
recently announced plans to leave the big Redmond, Wash., software
company, said the company had an annualized return of 54% on its
investments as of June 30, 1999. Not too shabby.
Of course, not all of the investments have been home runs. For instance,
AT&T's stock performance has been nearly break-even. Microsoft
invested $5 billion in the telecom giant back in May and AT&T stock is
roughly the same today; at the 4 p.m. close of New York Stock Exchange
trading Thursday, it stood at $49.0625, down $1.875. Microsoft invested
$30 million in NorthPoint Communications Group Inc., a
telecommunications company, at its initial-public-offering price of $24 a
share; at 4 p.m. the stock stood at $25.75, down 12.5 cents, on Nasdaq.
Microsoft isn't the only company scooping up minority stakes. Such
investments often make more sense than full-fledged acquisitions, for they
allow the buyer to monitor embryonic technologies without all the risk, plus
negotiate certain conditions.
"In rapidly evolving industries, a number of companies are hedging their
bets very broadly through a series of minority investments that give them a
leg up when the winners start to emerge," says Louis Friedman, head of
mergers and acquisitions for Donaldson, Lufkin & Jenrette Inc.'s
telecommunications and media practice.
Investment bankers note that a list of the most active corporate buyers and
financiers is filled with technology, media and telecommunications
companies -- a contrast from a few years ago, when the most active
acquirers tended to be companies trying to rapidly consolidate fragmented
businesses, such as banks, medical companies and car dealerships.
The main reason for the surge in deal making is that with technology
changing so rapidly, some of these large companies see acquisitions as a
quick, efficient way to bring a new technology to the marketplace, instead
of developing it from scratch.
"If you're one of the large players, the time-to-market issues are real-in
some cases there's no way your internal research and development is fast
enough and you can't spend the dollars effectively enough," says Mark
Shafir, head of technology investment banking at Merrill Lynch & Co.
Cisco Systems Inc., for instance, tends to pick up smaller companies to
build its already dominant Internet infrastructure business and last year
announced 18 acquisitions, excluding investments.
In August, Cisco said it would acquire Cerent Corp., a two-year-old
maker of switches for fiber-optic networks for $7.2 billion in stock. Cerent
had reported sales of only $10 million in its history, but Cisco needed
Cerent's gear to take on traditional makers of telephone-switching
equipment, such as Lucent Technologies Inc. and Nortel Networks Corp.
While Microsoft often uses cash for its investments, many other technology
companies use their highflying stocks as currency to do deals, so even if
they are paying supposedly high prices, it's only paper. "If you've got
Monopoly money, you can pay Monopoly prices," says one deal maker.
-- Scott Thurm and Don Clark contributed to this article.
Write to Nikhil Deogun at nik.deogun@wsj.com and Kara Scannell at
kara.scannell @wsj.com
Ian |
