As we move into 2013, the tech world is changing rapidly, as per usual. Companies are consolidating. Technology innovation is becoming an ever more consumer driven process. The biggest corporate war in history is the fight for mobile market share. Billions in market cap can appear and disappear in a matter of days. The rate of change for just about anything has increased exponentially. Tech giants of yesterday are being forced to rethink just about everything. Two companies that stand out among the herd are Microsoft (NASDAQ:MSFT) and Best Buy (NYSE:BBY). A question that I hear from investors constantly is, what is Microsoft (MSFT) going to do with all that cash? So the other day as more rumors surrounding the fate of Best Buy (BBY) hit the headlines, I asked myself an intriguing question.
"What if Microsoft (MSFT) bought Best Buy?"
Crazy, right? I know! But the more and more I have considered it, the more I have thought to myself, it's so crazy it just might work. Now to be fair, I want to make it clear I am not advocating for or against this idea. However I felt it would make for a very interesting and relevant discussion. So I look forward to your comments.
Let's take a look at what a hypothetical acquisition could look like, and how it could benefit the two companies. Last reported, Microsoft (MSFT) is sitting on just over $6 billion in cash and equivalents and $62 billion in short-term investments. Totaling about $68 billion in cash & short-term investments as of December 31st 2012. They currently have 8.4 Billion shares outstanding while Best Buy (BBY) has 338.1 million shares outstanding. There are several ways Microsoft could tender an offer. An all cash buyout at lets say $21 per share would cost Microsoft (MSFT) a little over 7 billion in which case they would have to liquidate some short-term investments to cover without outside financing. They could also offer a 1-1 swap issuing additional shares which would give Best Buy (BBY) stakeholders a higher price, but tie them to Microsoft (MSFT) stock performance. Going on 2012 numbers, issuing 338.1 million (MSFT) shares in exchange for (BBY) shares would dilute their earnings per share for the year by a little under $0.11. They could also tender a cash and stock combination deal. So with the buying power Microsoft (MSFT) is sitting on, the deal is fiscally plausible by a wide margin.
I guess the big question is, why and how could this benefit the companies? I think the easiest way to answer this is breaking down some ideas.
The Retail Storefront
- Now that Microsoft is entering the retail store business, having the expertise in supply chain management from Best Buy (BBY) could be a great benefit to Microsoft .
- I have seen what the Microsoft stores look like compared to Apple (NASDAQ:AAPL) stores and it's a difference of night and day. Instead of opening ground up retail spaces, I think having a showroom of similar sorts inside a Best Buy store would serve the company much better.
- Since Best Buy currently sells Apple (AAPL) products in their stores, the Microsoft (MSFT) show space would give consumers a chance to compare them side by side in real time. Keeping the recently announced price match, this could drive more customers to stay and shop in stores versus online giving a boost to Best Buy's numbers and Microsoft's.
- "If you can't beat em, join em." While not a proven strategy, it could give Microsoft (MSFT) a chance to pick up some profits off the popularity of its own competitor Apple (AAPL) as they would essentially be selling their products as well.
- Believe it or not, Microsoft and Apple work well together. Steve Jobs did it when he was rebuilding Apple, and there is no reason Tim Cook couldn't either.
- Best Buy (BBY) has better brand recognition as a place for consumers and businesses to shop in person. Microsoft (MSFT) is still widely viewed as the Windows company. Even if that fact is changing, Microsoft is still a long way from home in brick & mortar stores. Best Buy (BBY) could ultimately become the Mecca for consumer electronics offering products and education for everyone in a clear, concise fashion.
- The increased buying power could also help them further offer better pricing to the end user.
Infrastructure & Business Service Centers
- Best Buy (BBY) already has a dynamic and large infrastructure of store fronts. Best Buy & Microsoft both offer a multitude of b2b services. Best Buys infrastructure would allow Microsoft to expand their network of on the ground professionals and increase their outside sales force by integrating the store fronts as central hubs.
- This would also help Best Buy's business service unit to expand into additional territories as they could offer more expertise and products at lower costs to local business.
- With pretty much all serious competitor products being available in one store, Best Buy could even open up its infrastructure allowing Apple (AAPL) to place more experts for business on the ground as it continues to grow in the business service space.
Mobile, Mobile Mobile
- Best Buy (BBY) already sells just about every phone, for every carrier. Having the store front and expertise to educate consumers would help Microsoft (MSFT) promote their Windows phones at a much more rapid pace than establishing "Microsoft Stores".
- Once again, Microsoft (MSFT) could even see the benefits from selling its competitor Apple's (AAPL) iPhone in Best Buy (BBY) retail locations.
- As a central hub to compare and contrast with price match, Best Buy (BBY) central and mobile locations could see a drastic increase in mobile phone sales.
- All of these facts still remain true in the increasing tablet business now that all the major players are producing them.
In conclusion, a marriage of these two companies has some serious potential. With both companies trailing the competition in their respective industries, a deal like this could be the boost they need to catch up. It's important to note however, the major differences in the business they conduct could result in some serious additional costs to make the integration work. For now, only time will tell but in my opinion, enough reasoning exists that it should be opened for discussion as a viable option.
Disclosure: I am long BBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.