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Future Microsoft

March 3

You're Microsoft, the world's most valuable company, and you've got $40 billion in cash. You built your fortune by locking down the ubiquitious PC's operating system, then using that platform to launch into a suite of the most popular office applications. Now what do you do? What will you look like in 2005, and will M&A play a key role in that evolution?

Microsoft tried out a new template for growth in the last several years by acquiring Great Plains Software (accounting applications for the smaller US business market) and Navision (ditto for the European market), each for over a $1 billion. Like a Japanese auto maker, Microsoft -- having first dominated the market for lower-priced products -- was now moving into more sophisticated applications, those for the mid-sized corporate market.

But the Navision deal stirred EU trust busters who made it clear that larger deals would attract their unwelcome attention. So Microsoft's most recent purchases -- those of PlaceWare, a vendor of web-conferencing software, and Connectix, a vendor of mult-operating system software for servers -- still focus on the mid-sized business but their values are more modest.

We think that's how Microsoft will continue to grow: by buying niche players to tuck into its growing portfolio of applications operating within the company's Business Solutions Division. Anticipate these M&A targets to have values of from $100 million to $$400 million.

But what about Microsoft's $40 billion in loose change? Even lots of smaller deals won't diminish this giant, perpetually growing war chest. How about returning some of the largess to stockhoders in the form of a dividends, giving them the oppportunity to seek out higher returns freed of the political structures placed on the world's biggest company?


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