Microsoft Buys Fast, Plays Catch-Up

Can Microsoft's acquisition of a company that sells specialized search engines help it close the overall Web search gap with Google?

by Aaron Ricadela

Ever lagging in the lucrative business of Internet search and related ads, Microsoft (MSFT) is dipping into its cash reserve to buy a Norwegian company it hopes will create a new flank in its bid to chip away at Google's market dominance. Microsoft said Jan. 8 it is purchasing Fast Search & Transfer for $1.23 billion, paying a 42% premium for technology to compete in the expanding market for corporate search software.

Fast sells search engines that let companies comb through the gobs of digital information they generate these days, a capability where Microsoft's current search arsenal comes up short. Using Fast's software, employees can find operational data stored in the vast array of folders and databases on their corporate servers. The technology is also used to let consumers sift through online product catalogs more quickly; retailer Best Buy (BBY) used Fast's software to improve the search engine on its Web site this past holiday season.

Better Returns?

Jeff Raikes, president of Microsoft's business software division, called corporate search technology an "indispensable tool" for companies dealing with an explosion of data about their products and performance. Corporate search "will be for workers tomorrow what Internet search is for consumers today," he said in a conference call after the deal was announced. Fast's software may also help Microsoft improve its Web search engine while bolstering the company's research and development efforts in Europe, added Raikes.

Whether the deal pays off may turn on two questions: Can Microsoft use its direct sales force and network of resellers to ramp up Fast's sales quickly enough to move the needle on Raikes' $16.4 billion-a-year division, which produces the company's flagship Office software suite? And can Fast's stable of nearly 200 engineers adapt their expertise to consumer Web search and online software, key businesses for Microsoft?

The deal comes after a rocky stretch for Fast, whose shares had lost half their value over the past two years. The company has been laying off workers, having posted losses the past two quarters. Microsoft has agreed to pay 19 Norwegian kroner per share, or about $3.54, for Fast's stock, which shot 41% higher, to 18.8 kroner, on the news. Fast's board and two of its largest shareholders have accepted Microsoft's offer, the companies said. In December one of those shareholders, Orkla, had called for a shakeup of Fast's board.

Buying Fast will cost Microsoft less than three weeks' worth of free cash flow, and could provide better returns on the company's $21.6 billion cash pile than stock buybacks and dividends, says Brendan Barnicle, a vice-president and senior research analyst at Pacific Crest Securities. "Microsoft has tried everything in the world with its cash," Barnicle says, "and nothing has really worked for the stock." Shares of Microsoft closed Jan. 8 down $1.16, or 3.35%, at $33.45. Barnicle has a target price of $42 for the shares over the next 12 months.

Nudging Market Share

The acquisition will give Microsoft an immediate strong presence in the market for corporate search software thanks to Fast's high-end roster of clients, including Merrill Lynch (ML), Disney (DIS), Best Buy, Pfizer (PFE), and Dell (DELL). The Norwegian company's chief rivals in the estimated $4.8 billion business include Google (GOOG), IBM (IBM), Britain's Autonomy, Oracle (ORCL), and SAP (SAP). Fast was on track to book $200 million in 2008 sales—about 20% higher than in 2007—and Microsoft's direct-sales and reseller network can expand that, UBS (UBS) analyst Heather Bellini wrote in a note to clients.

Microsoft plans to combine Fast's technology with its SharePoint Server software, which a company can use to let its workers share documents over the Internet. Another possible opportunity for Microsoft would be to make Fast's software more customizable, something Google's corporate search-engine server doesn't allow, says Jim Murphy, an analyst at AMR Research. Microsoft could also use Fast's technology to add features to its Live brand of online software for e-mail, word processing, blogging, and photo sharing, making it easier for users to find information generated by those applications and stored within the company's huge data centers.

But whether Fast can help Microsoft close the gap with Google in the market for mainstream Web search is another matter. Microsoft's market share has been stagnant, with its sites accounting for 9.8% of U.S. Web searches in November, compared with 58.6% for Google and 22.4% for Yahoo, according to comScore (SCOR). "What's unclear to me is whether there's any way to leverage [Fast's technology] in Internet search, where [Microsoft has] been lagging," says Barnicle.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.