Software Notebook: Microsoft in buying mood
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Spending spree takes aim at smaller companies
By TODD BISHOP
SEATTLE P-I REPORTER
Monday, August 21, 2006
seattlepi.nwsource.com
Microsoft Chief Executive Steve Ballmer was quick to reply when recently asked why the company wasn't pursuing acquisitions more aggressively.
"We are buying more companies than we have ever bought," Ballmer said in response to the question at Microsoft Corp.'s annual meeting with financial analysts.
In fact, the company significantly picked up its pace of acquisitions in its recently completed fiscal year -- making 23 deals, compared with nine the year before.
And Microsoft doesn't appear to be slowing down, announcing a few more deals since the June 30 end of its 2006 fiscal year.
But the buying spree comes with a twist, focusing on considerably smaller acquisition targets than in the past. Microsoft says it spent slightly less than $650 million on 23 acquisitions last year. By comparison, the company spent more than $2 billion on three companies alone in fiscal 2003.
"With smaller ones, what you're really buying is the technology that they've developed, and in some cases the people who are developing it," said Charles Di Bona, financial analyst at Sanford C. Bernstein & Co. "They're fairly straightforward investment decisions as opposed to all this 'synergy.' "
Microsoft has pursued larger deals, including unsuccessful talks with Time Warner's AOL unit and reported discussions with Yahoo. But its recent tendency toward smaller acquisitions reflects a general trend in the tech industry, after an era in which many mega-mergers didn't work out as planned.
Microsoft also has had a much harder time than expected integrating the business applications it picked up with its $1.1 billion acquisition of Great Plains Software in 2001 and $1.5 billion deal for Navision in 2002.
"I think when they look at what they paid for Great Plains and Navision, and what they expected from those businesses, and how long it has taken to integrate them into Microsoft, they'll be very cautious about big acquisitions for precisely that reason," said Matt Rosoff, analyst at the independent Directions on Microsoft research firm.
The smaller deals often don't contribute significantly to the bottom line in the short run. But in some cases, their effects have been seen relatively quickly in Microsoft products.
Windows Live Writer, a blogging program released in test form last week, started inside Onfolio Inc., acquired by Microsoft in March.
Last month, Microsoft introduced a new project called Photosynth based in part on technology from Seadragon Software, acquired in February.
At a conference last week, executives with in-game advertising company Massive Inc., another recent Microsoft acquisition, discussed their efforts to integrate their technology with Microsoft's online advertising system.
In the online world, Microsoft faces some serious competition in its pursuit of smaller companies and startups.
Google Chief Executive Eric Schmidt told reporters at a conference last month that Google buys companies at a rate of one or two a week, many of them as small as one to three people.
Google also was able to land a deal with Time Warner that included a 5 percent stake in AOL, thwarting Microsoft's attempts to strike its own agreement.
Meanwhile, Microsoft has been making acquisitions in other sectors, including a series of security-software companies whose technologies have helped it form a fledgling product line.
Last month, the company made an acquisition that will move it into another sector, announcing plans to buy a patient-information system, Azyxxi, which was developed at a hospital in Washington, D.C.
And Microsoft's purchase last year of collaboration-software company Groove Networks Inc. has become particularly notable because of the person who came with it -- Ray Ozzie, who has now succeeded Bill Gates as chief software architect, as part of the Microsoft chairman's transition to full-time philanthropy.
Many of the company's deals are small enough that they're not considered material to the company's financial results, letting Microsoft avoid disclosing individual purchase prices.
Chief Financial Officer Chris Liddell disclosed the deal volume for the past two fiscal years -- $207 million in 2005 and $649 million in 2006 -- during the company's annual meeting last month with analysts.
The company declined to comment on its acquisition strategy last week, but Liddell told analysts that he considered the recent pace of acquisitions about right for the time being.
One analyst pointed out the huge number of users that some popular online sites have attracted and asked why Microsoft isn't acquiring them. Ballmer responded that the company isn't focusing as much on the number of users as on whether those users translate into revenue.
Speaking to the analysts, Ballmer recalled a recent negotiation in which one company with less than $20 million in revenue was seeking a purchase price of more than $500 million.
Microsoft didn't end up making that deal. However, Ballmer said, "We thought about it."
NEW ADDITIONS
Microsoft says it paid $649 million for a total of 23 companies in its recently completed fiscal year. A sampling of its acquisitions:
Alacris Inc., Ottawa, Ontario: software for smart-card systems.
Apptimum Inc., Sunrise, Fla.: maker of Alohabob PC Relocator products for transferring applications between machines.
DeepMetrix Corp., Gatineau, Quebec: Web site analysis company.
FrontBridge Technologies, Los Angeles: corporate message filtering and scanning services.
GeoTango International Corp., Toronto: 3-D visualization and mapping technologies.
Lionhead Studios, United Kingdom: maker of the "Fable" game for Xbox 360 and Windows.
Massive Inc., New York: in-game online advertising technology.
MotionBridge, Paris: search technology for mobile devices.
Onfolio Inc., Cambridge, Mass.: Web clip and blogging technology.
Seadragon Software, Seattle: image-browsing technology that has been integrated into Microsoft's Photosynth project.
Teleo Inc., San Francisco: Voice over Internet Protocol software.
Vexcel Corp., Boulder, Colo.: image and remote-sensing technologies to augment Microsoft's Virtual Earth group.
Whale Communications Ltd., Fort Lee, N.J.: technology for remote access to corporate data and documents.
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