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Microsoft and M&A (or the Lack Thereof)

7/28/06

Reuters reports that Microsoft -- while characterizing itself as being in “high investment mode” and “very acquisitive” -- spends but a tiny fraction of its treasure on M&A.

In the last year, the company purchased 23 companies for $649 million, averaging about $28 million per deal.

Compare that to a marketcap of $244 billion, about $40 billion in cash, and the company’s plans to spend $20 billion buying back its own stock in the next month, with another $20 billion in buybacks planned through the year 2011.

CEO Ballmer is quoted as saying that “our heavy focus is on our own people and our ideas,” and that acquisition targets’ asking prices are too high.

We sympathize with Ballmer’s position. After all, Microsoft would certainly attract an angry, global swarm of regulators should it attempt any deal big enough to make a material contribution to revenue.

We also understand Ballmer’s reluctance to engage in dilutive transactions now that Microsoft’s stock trades at a trailing price/earnings multiple of about 20. Hot young technologies go for a lot more than that, even assuming they have earnings to price. If you’re managing the business to maximize current profit, you’re not going after these sorts of targets.

But Microsoft’s chosen course also has its risks. Clearing $40 billion off the balance sheet certainly limits future flexibility in the face of emerging challenges, even for giant Microsoft. And failing to swoop in early on market trends like the personal networking phenomena means the company’s always playing catch-up. When was the last time Microsoft’s internal R&D produced these sorts of Internet hits, or even capitalized on them?


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