Microsoft's Urge to Merge

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"The Gloves Are Off"

The need to bulk up online has become even more acute since Microsoft lost out to Google on the acquisition of banner-ad distribution company DoubleClick on Apr. 13 (see BusinessWeek.com, 4/14/07, "Google's DoubleClick Strategic Move"). Jaffe says Microsoft's failure to snare DoubleClick hasn't changed its plans. "Our strategy's the same after the DoubleClick trade," he says. "I don't think there's one company that will make or break us."

Google's using acquisitions to corner Microsoft in other areas, too. On Apr. 17, it bought presentation-graphics software company Tonic Systems, whose online TonicPoint software can also read and edit Microsoft PowerPoint files. And the company's scattershot approach makes it hard for Microsoft to predict where it will aim next. "Google is creation, at some levels, through chaos," says Buyer. "This isn't about everyone trying to row in the same direction to get there faster."

Other companies, too, are using M&A to put the hurt on Redmond. On Apr. 30, Yahoo said it would buy the 80% of online advertising company Right Media it didn't already own, for about $680 million (see BusinessWeek.com, 5/1/07, "The Promise of Online Display Ads"). And Cisco Systems' (CSCO) $3.2 billion buyout of WebEx Communications on Mar. 15 will pit the company directly against Microsoft in the market for online videoconferencing and collaboration. "The gloves are off," says Charles Giancarlo, Cisco senior vice-president and chief development officer.

Integration Is an Issue

Now, the question hovering over Redmond is whether it can pull off a multibillion-dollar buyout. In an interview, Microsoft chief research and strategy officer Craig Mundie says management has become more "flexible" to consider large acquisitions, as evidenced by its 2004 negotiations to buy German software giant SAP (SAP).

Yet not all of Microsoft's large acquisitions go as planned. The company's Dynamics business applications group, which consists of its $1.1 billion acquisition of Great Plains Software in 2000, and Navision, bought for $1.45 billion in 2002, has struggled with profitability and management changes. Microsoft's $425 million acquisition of WebTV Networks in 1997 never took off, and WebTV technologists are now scattered throughout the company's MSN, Xbox, and IPTV groups. And sales of professional drawing software Visio, which Microsoft bought for $1.3 billion in 1999, fell 22% in February, despite the first new version of the software in several years, according to a Mar. 27 report from Merrill Lynch (MER).

Evercore's Roberts says Microsoft Chairman Bill Gates and CEO Steve Ballmer challenged senior executives at the end of 2004 to get more aggressive on the acquisition front instead of "cleaning up messes" from bad deals.

Leveraging MSN Properties

According to Jaffe, Microsoft plans to pursue deals that can bolster its presence in Web searches for specific areas of expertise, along the lines of the company's Feb. 26 acquisition of Medstory, which lets consumers winnow down searches for online health information. The company also wants to do deals that can help it make money from its MSN properties Hotmail and Windows Messenger, something Microsoft currently doesn't do. "It's more than just what we do on search," he says.

Yet for Microsoft to satisfy investors and position itself for future growth, it may need to soon turn its revved-up M&A engine on that very area.

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