Microsoft (MSFT) has a killer franchise, we all know that. Its Windows operating system and Office programs continue to generate tens of billions of dollars every single year. Sure, there has been some level of competition from Google (GOOG) and others but overall, the growth in emerging markets has been enough to offset that, helping Microsoft generate billions of dollars per year. Steve Ballmer has used that money to try to create other profitable businesses. Its first success has been in gaming. Sony’s Playstation and Nintendo’s Wii seemed locked in as leaders but Microsoft’s Xbox franchise has been a game changer that is now an important part of Microsoft.
Microsoft’s the Dubai Of Tech?
In many ways, I like to compare Microsoft with Dubai. Why? The UAE got solid cash flows from oil for several years and used that business to build many other businesses, such as its airline, real estate and other tourist attractions. However, don’t get me wrong, Dubai has also had its share of failures and proved several times how difficult building secondary businesses can become. Microsoft has also had its share of failures including two major sectors:
- Online Business
In both sectors, Microsoft has been unable to get those businesses off the ground despite putting money and energy into them. On the mobile side, Windows Mobile has now been made nearly irrelevant in the smartphone business. Will its recent purchase of Nokia’s (NOK) phone business help? It might… but probably not enough.
As for its online business, Microsoft continues to lose considerable amounts of money in its online business, around $1 billion per quarter with no slowing down. Sure, Microsoft has been able to gain some traction, reach the status of being Google’s top search competition. But hardly anyone would call the results so far a success.
(Click charts to expand)
In both cases, Microsoft has great opportunities right now to turn things around. While the company does aspire to pay out more dividends, it still has tons of cash to spare with more coming in every month. What to do with that cash? Right now, two possible acquisitions would be big enough to have an impact on those results. Let’s take a look:
Option #1 – Buying Yahoo (YHOO)
Following the very public firing of CEO Carol Bartz, Yahoo is now considering all of its options (and so are investors like myself). The company is clearly far from the gem it once was but still pulls in a great number of visitors, has one if not the top online brand and already has strong ties to Microsoft. In fact, it was only a few years ago that Microsoft tried to buy Yahoo for $44.6 billion in 2008. The cost of doing so today could be less than half with Yahoo now trading at a value of $17.5B or so.
In fact, the cost of buying Yahoo could come out much smaller than that. Microsoft would likely try to sell several of Yahoo’s more valuable Asian holdings such as its Alibaba (ALBCF.PK) stake, which does not really fit in Microsoft’s strategy. How much are those worthy? The estimates vary quite a bit but most agree that those grouped together represent the majority of Yahoo’s value, meaning that the acquisition could come out at a reasonable price.
How would a Yahoo acquisition fit? I think one point is that Microsoft has quality holdings, a strong relationship with Facebook but one thing it does lack is quality content and holdings. Yahoo does have exactly that and could surely benefit from Microsoft’s strong technical/engineering. Also, the Yahoo-Microsoft search alliance has had tricky results at best. It’s not easy to get the two companies to collaborate entirely and buying Yahoo’s properties would surely diminish the conflicts/questions. Honestly, Yahoo’s acquisition could boost the speed at which Microsoft’s online business would become profitable significantly.
Option #2 Buying Research in Motion (RIMM)
While RIMM is clearly not doing very well, it does remain one of the big three in the smartphone market. Sure, RIMM clearly lags Apple (AAPL) and Google Android powered phones in terms of market share, it is not YET irrelevant. A big part of the reason is the fact that RIMM has a strong user base including a lot of corporate clients. I’m a big time basher on RIMM and I do not expect much in terms of its future but being bought by Microsoft could help turn things around. The cost would be a bit lower than buying Yahoo as RIMM currently trades for under $12 billion. The big difference is that while profitability is coming down very fast, RIMM is making money and would help Microsoft’s bottom line (to give you an idea, RIMM is tading at a P/E of 4). There could also be synergies both in terms of mobile but also getting developers to put more energy into working on apps for RIMM could help out quite a bit.
Would such an acquisition be seen as problematic by Canadian regulators? They did end up causing the Potash (POT) deal to fail and many do think such a move would be blocked by Canadian authorities. I personally do not think so. While Potash was doing well and very profitable, RIMM is clearly on its way downward and seeing its Waterloo center become obsolete would be tragic. Instead, having a strong new owner could help turn things around.
Another good thing is that both companies are very focused on enterprise and could certainly work together in securing clients, offering joint solutions for mobile and desktop solutions.
Would Microsoft try to squeeze out RIMM’s operating system? Windows Mobile is not seen as being superior to RIMM’s O/S so switching would probably not be a good idea. If that’s the case, where could Microsoft help? It’s not clear. The reason products such as Zune failed isn’t because their hardware was so great. Where is the synergy? Unclear to me. I do still think that the deal could work out with RIMM operating as a fairly independent company. Benefits of working together would happen along the way without being forced from the start.
Yahoo Is The Best Option
It can certainly be debated but I personally consider it very clear that Yahoo would be a much better fit and has a lot more potential. Buying the company now that Carol Bartz is out would be a bit more expensive but I think taking control might be easier as the board and shareholders certainly seem more desperate. What are your thoughts?