There has been growing concern about Microsoft (MSFT), as its recent write-down will cost investors a good amount of money. This has also made investors and analysts more skeptical of Microsoft's acquisition of Yammer, from the not-too-distant past. With this in mind, I will address how the write-down will impact investors, but I will also address how things appear for Yammer. Specifically, I will investigate how things currently appear with competitors Salesforce.com (CRM) and Jive Software (JIVE), although this news may impact other companies as well. I think that some have been exaggerating how poor the situation is for Microsoft, but I do believe there is some cause for concern as well.
Microsoft is currently trading around $31 and has not moved very much over the past two weeks. Its 52-week high is $32.95 and its 52-week low is 23.79. Its market cap is $257.91 billion, and its operating cash flow is $29.89 billion, which means that it certainly has some power to flex around the industry.
Microsoft expects to take a fourth-quarter loss after its write-down of its online advertising company aQuantive. It anticipates taking a $6.2 billion "noncash goodwill impairment charge," which will reduce fourth-quarter earnings significantly. Instead of the estimated 62 cents/share gain, fourth-quarter earnings will likely drop to roughly a 10 cents/share loss. Microsoft also believes that its Online Services Division will not be as strong as it had previously anticipated. With the failure of this previous acquisition, it is not surprising that some are calling into question Microsoft's recent acquisition of the social computing company Yammer.
Some have noted that this write-down did not surprise most investors, however, so this would help explain why the stock did not drop much after the announcement. It is also a comfort to most investors that Microsoft's core business appears solid, especially with new products like Windows 8 and the Surface tablet coming in the near future. Microsoft's core business is therefore not under attack, but its attempts to reach new markets are not receiving as much praise.
Not long ago, Microsoft acquired Yammer for a hefty price of $1.2 billion. This would help Microsoft provide better services to businesses, as Yammer is an "internal social media platform that allows employees to network, manage tasks and workloads and essentially be connected to every other person in the company seamlessly." This is something in great demand at the moment, so some even wonder why Microsoft did not act sooner to make a move in this market.
Things are still a little unclear, but predictions are beginning to surface about what Microsoft will do with Yammer. It is quite possible that Microsoft will integrate Yammer with current business software like Excel and SharePoint. Some have also predicted that networking will eventually become a part of Yammer, making collaboration between different companies and organizations more possible. This could even reach the education market at some point in time. Some predict that Microsoft will integrate Yammer with other useful tools and software. It may do this with its recently acquired Skype, for example, allowing for video conferencing. All of these show how Yammer could be a success for Microsoft, but I think the intense competition must still be considered.
Salesforce is currently trading around $142. Its market cap is $19.65 billion, and its operating cash flow is $665.20 million. It's definitely smaller than Microsoft, but there are analysts and investors with high hopes for Salesforce.com. The 27% that the stock price has gone up in 2012 certainly helps instill that confidence as well.
Salesforce essentially chose to copy Yammer when it created Chatter. Despite this, Chatter has done well in taking some customers from Yammer and undertaking a more "holistic" approach to social computing. Regardless, the potential acquisition from Microsoft was overshadowing the conference for Salesforce last month. This shows that Yammer and Microsoft are drawing a lot of interest. Furthermore, as Yammer has struggled mostly with getting customers to use its paid services and with integrating with existing business programs, the Microsoft acquisition should help Yammer take back some control in the industry. Salesforce's Chatter will struggle to overcome the hype of Microsoft and Yammer, so I do not think this is a good time to get involved with Salesforce stock. Chatter will not simply go away, but it may lose market share due to this acquisition.
Jive is currently trading around $21, and has mostly been rising since early June. Its market cap is $1.27 billion, and its operating cash flow is -$8.06 million. Its revenue for the trailing 12 months (as of March 31, 2012) is $86.54 million, but its revenue may be increasing after Microsoft's acquisition.
Jive is similar to Yammer, and it has been drawing increased attention after Microsoft's acquisition. Many believe Jive is an attractive potential acquisition for other companies, and analysts believe it may increase its revenue by roughly 157% by 2014. It may draw attention from Microsoft competitors like Oracle (ORCL) or SAP (SAP), but I do not think these companies will take action immediately. Microsoft purchased Yammer for roughly 50 times the social computing company's revenue. This means that it must believe it can increase its revenue significantly, as the deal would not make sense in any other way. Investors should watch Jive, as it will probably become a bigger competitor as time moves on. Do not expect quick actions from Oracle or SAP though, as most companies will likely be hesitant to pay nearly as much money as Microsoft did.
In the end, I think Yammer has potential, regardless of the high price Microsoft paid for it. Investors have every right to be upset about the aQuantive write-down, but this should not impact how they view Yammer. Predictions are starting to come in for how Microsoft will use Yammer, and although these are speculative, I am optimistic at this point in time. It may integrate it with a variety of different business services, making Yammer more profitable and helping it achieve the "holistic" approach that Salesforce's Chatter has had success with. In other words, Microsoft should be able to address Yammer's core problems. Competition will be increasing, especially from Jive and any company that considers an acquisition, and investors will lose some confidence after the recent write-down. Despite this, I think the write-down was more of an isolated fluke than anything else, and it has already taken its toll on the stock. Microsoft is still in a decent position, and I would recommend this stock with just a slight bit of hesitation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.