Microsoft has recently made headlines with the news of acquisition of Skype with a hefty $8.5 billion price tag, which is the largest acquisition made by Microsoft ever.
Microsoft has $45 billion of cash, and it is trying to figure out what to do with it.
Microsoft was founded by Bill Gates III in and since then, it has been successfully establishing various software products and services to maintain its position as one of the world’s leading companies.
The accomplishments of Microsoft is evident from the fact that it develops, licenses and manufactures an extensively diversified range of products and services under various business segments which include Windows & Windows Live segment (Windows operating system, Windows Live and Internet Explorer), Server and Tools segment (Microsoft SQL Server, SQL Azure, Silverlight, Visual Studio, etc), Online Service Division segment (MSN portal and Bing), Microsoft Business Division (Microsoft Office, Microsoft Dynamics ERP and CRM, etc.), and lastly Entertainment and Devices Division segment (Windows Phone, Xbox 360 platform, PC software, etc.). Microsoft currently has approximately 90 million business customers, 400 million Windows Live users, and more than a billion Windows operating system users worldwide.
Despite Microsoft’s hold as a leading company in various market segments, it faces high competition from Apple and Google. Zune, Microsoft’s portable music device, only sells one-50th of the amount Apple’s iPod sells. Google’s Android platform and Apple’s iPhone platform is outshining Microsoft’s Windows platform for mobiles.
Therefore, in order to spread its wings beyond software products and actively compete with major firms like Apple and Google, Microsoft has, over the past few years, adopted a rather aggressive strategy of acquiring companies which allow it to diversify its products and services.
In 2008, it acquired Fast Search and Transfer ASA, global leaders in business-intelligence software, to cater to the demand for a search engine designed specifically for big corporations. Almost all the acquisitions have been disasters.
However, Microsoft today can only be described as dirt cheap. It trades at 7-times earnings when you take out their hoard of cash.
Warren Buffett even stated (before the Skype acquisition) that he would buy the stock, but there might be a conflict of interest. The conflict of interest is because Buffett helps run the Gates Foundation, and Gates is on the board of Microsoft.
This was the first time; Buffett ever stated he wanted to buy a technology stock.
However, Steve Ballmer is a value destroyer. He made a disastrous acquisition of Skype at an exorbitant price. Although the company is cheap, I decided to sell because a cheap company can be run into the ground by bad management.
Yesterday, famous hedge fund manager David Einhorn called for the ouster of CEO Steve Ballmer. I agree, and if this happens I might consider buying the stock.
(The author of this article has no position in Microsoft currently.)
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