$MSFT – Web 2.Oh?!

by Dan June 13, 2016 4:08 pm • Commentary• Trade Ideas

Earlier today I offered some initial thoughts on Microsoft’s (MSFT) $26.2 billion cash bid for LinedkIn (LNKD), ($MSFT gets $LNKD). In a nutshell, my view is this deal is just another attempt, in a long line of failed attempts over the last 10 years of MSFT to divert attention from their reliance on PCs towards faster growing business away from their core competency.  For the most part they do not have a great track record in doing so:

former MSFT CEO Steve Ballmer made three large acquisitions in 7 years prior to Nadella taking the CEO helm, equaling nearly $23 billion, also attempting to diversify away from its core PC reliance.

MSFT spent $6.2b for aQuantative in a an attempt to help Bing compete with Google when no one esle thought that possible. They ended up writing it all off: http://www.bloomberg.com/news/articles/2012-07-02/microsoft-will-write-down-6-2-billion-related-to-aquantive-deal
MSFT Bought Skype in 2011 for $8.5 billion in the pc to pc communications space when internet services were still a thing. It’s probably worth much less now:https://www.theguardian.com/technology/2013/aug/30/skype-microsoft-acquisition-analysis
And finally MSFT thought their mobile OS could resurrect a long dead mobile device company and bought Nokia devices in 2014, wrote off $7.6 billion 
Two of these three acquisitions have been written down to nearly nothing, and I suspect Skype is worth much less than the $8.5 billion purchase price. Ballmer’s MSFT sucked at acquisitions.

Over the next few days/weeks, there will be no shortage of peeps like my self making claims what MSFT should have, or at least could have bought with the $26 billion in cash.

Should we take a look? Ok, here we go…

Social Media, not Business Social—-> Could have paid $30 billion for SnapChat, recently valued at $20 billion in private market and if bargain shopping maybe $13 billion for Twitter, currently has a $8.4 billion enterprise value. Neither is an exact fit, but Twitter helps with Bing conceivably and Snapchat helps with the kidz.

Content Delivery / Connected Home—-> Netflix (NFLX), currently $40 billion market cap and $8.7 billion in expected 2016 sales, or nearly 10% of their existing expected sales.  If MSFT wanted to leverage the positioning of Xbox in the living room, and moving deeper into the connected home, this could be one way to do it.  Except Reed Hastings is not likely to see to anyone unless the purchase price came at a new all time high, which would be about 30% higher, or somewhere north of $50 billion. That was not happening, the last deal MSFT made in this area was Mojang, the maker of Minecraft back in 2014 for $2.5 billion.

Yeah they could also buy Pandora (P) and Spotify probably for a combined $15 billion in an effort to compete with Apple and Amazon. But as a play in the connected house using Xbox as their trojan horse, Netflix is the biggie.

e-Payments—-> PayPal (PYPL), competitors Apple (AAPL), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL) are all making a push in ePayments in some way shape or form, with ApplePay, Amazon Pay With button, Facebook thought to be monetizing WhatsApp with a peer to peer payments and Google with Wallet. MSFT has nothing, despite being knee deep in the mobile OS biz with Windows mobile. PayPal checks all of the boxes above with their core offering that has strong connections with business and with their Surface offering could be positioned against Square, or Pay buttons in website which could be a good fit for Bing or in App which could be useful for Windows Mobile OS and obviously PayPal’s p2p Venmo service could be the company’s crown jewel.

Search —> could have finally bought Yahoo Inc’s (YHOO) core search business for probably less than $5 billion.  Remember back in February 2008 when MSFT bid nearly $45 billion to acquire YHOO.  YHOO currently has a $35 billion market cap, $5.8 billion in net cash and a some of the parts, assuming tax free spin of their remaining Alibaba stake somewhere close to $45 billion, so maybe MSFT could have just the part that would help them beef up their own efforts in on-the-line search with their perennial three player Bing.

Cloud baby! / SaaS / PaaS —-> And there were the rumors that Mr. Nadella had his eyes on SalesForce.com (CRM), and last year went as  far to offer a $55 billion purchase price, but as CNBC’s David Faber reported in late May 2015, talks stalled as CRM CEO Benioff wanted $70 billion. While $70 billion might be considered a staggering sum, it might have made a bit more sense than the deal they inked this weekend given their intent to migrate most software sales to cloud based offerings.  Which brings you to SeviceNow (NOW) or Workday (WDAY), which would likely command purchase prices of $15 to $20 billion, but both would be far more expensive on a price to sales basis, at least 10x on a 30% premium to existing prices.

Internet Services  —-> You might not remember, but Expedia (EXPE) was launched in the mid 1990s by MSFT, and was spun out in 1999.  The company is expected to have $9 billion in sales this year. Maybe MSFT would be wise to piece together a suite of internet services like Zillow (Z) and Grubhub (GRUB)?.

I am sure that I am missing a few that may make more or less sense. The main point here, is that not many of these  are more fat fetched than MSFT spending what they did for LNKD. It’s all a matter of what direction you think the company should be moving in.

Maybe they’ll make LinkedIn a good fit. It’s obviously way to early to make the call. But what can be predicted now is that this deal will light a fire under some of their competitors who are also sitting on piles of cash that ain’t earning them a whole heck of a lot. Figuring out which ones will be bought would have been as hard as guessing that Microsoft was a good fit for LinkedIn.

Or maybe we’re all looking at this wrong, it could have just been simple user error: