Problem: What Microsoft can acquire in terms of investing in other companies to build their organizations portfolio, such as acquiring another company like aQuanitive
Using the most recent annual report and other financial statements submitted to the SEC, select a financial initiative from the "management's message" to the shareholders. Compare and contrast three potential financial outcomes that your Learning Team envisions for the proposed initiative(s). Evaluate your findings to determine the most likely outcome. Additionally, be sure to include your calculations which support your analysis of the various financial outcomes and discuss the financial impact on your selected organization. Be sure to properly cite your references in your paper.
Case study: Financial Outcomes
Microsoft is a computer software company that has had huge success due to the operating system and office products offered by the industry leader. The company began in 1975 and has become one of the most recognizable companies in the world through the hard work and intellect of Bill Gates. The firm grew quickly and started to acquire other technology related companies in 1986 which helped to put Microsoft in the position enjoyed today. One of the most recent acquisitions was of a digital marketing company by the name of aQuantive. Microsoft hopes to enter into the online advertising market with the acquisition aQuantive. The outcome of the acquisition us unknown but the initiative has the potential of being a positive strategy or a determent to the firm.
According to Microsoft’s 2007 annual report, Microsoft Corporation announced that they had acquired aQuantive. This acquisition is the most significant in Microsoft’s existence and the estimated value is around $6 billion. Microsoft was already a customer of aQuantive for many years (Microsoft Corporation, 2007).
From a positive standpoint Microsoft is intensifying the vision to provide users with superior products, the acquisition will enhance relations with advertisers, publishers as well as amplify the build and support on future advertising platforms, solutions, and environments.
Microsoft is making strides in being committed to getting their share of the market; as such this acquisition would give them a complete end to end solution, like paid search and display ads (Microsoft Corporation, 2007).
According to Microsoft the deal will make their time to market much quicker. They are looking to consolidate their inventory from both sites to create more scale for ad network. Some of the benefits they have outlined are advertiser and ad agencies will benefit from the creation of a media planning, buying, and campaign management solution to drive maximum return on investment, (ROI), and enhance their reach. Another benefit would be owners and publishers of media will get access to inventory optimization and accelerate solutions across a full suite of enhanced media, video, which would have targeting capabilities via aQuantive operating units of Atlas Publisher and DRIVEpm (Microsoft Corporation, 2007).
In dollars and cents, Microsoft estimates that the current online ad market is worth around $40 billion annually and is growing 20% per year, so if the their acquisition of aQuantive came at a cost of $6 billion and the annually. At the time of the acquisition aQuantive had a market cap of $2.8 billion, with that said, and knowing that the approximate growth rate for the industry is 20% per year return rate (Arrington, 2007). Microsoft could expect, without doing a whole lot for the first five years a return on their investment of $6.97 billion, and when the sale of $6 billion is deducted in year five, Microsoft would make $97 million.
Microsoft’s acquisition of aQuantive, a digital marketing services agency, will likely prove positive for the firm but the possibility exists that the acquisition will hurt Microsoft partly due to the large price paid for the firm. The $6 billion paid for aQuantive is not a lot of money compared to the total value of Microsoft but such a large acquisition could take time to recoup a profit on the purchase. The desire to be an advertising company as well as the industry standard in software and operating systems may come at a cost for Microsoft. The $6 billion paid is estimated to be ten times the revenue for aQuantive. The acquisition is perceived to be a drastic move for Microsoft considering the high price paid and lack of negotiations in order to stay competitive with Google and Yahoo.
Microsoft has been the leader in the software industry since the inception of the company but has recently taken on the difficult task of competing for the top position in the areas of search engines and online advertising opportunities. Google is the leader in the online advertising industry with $10.5 billion followed by Yahoo with $5.6 billion. Microsoft holds the third position in the industry with $1.6 billion. The $6 billion paid for aQuantive is $5.4 billion over what Microsoft is estimated to be worth in that advertising sector. Being so far behind the competition is difficult to overcome even for a company with as much capital as Microsoft. The $40 billion industry of online advertising is worth going after but the attempts by Microsoft could be too late. While Microsoft is trying to incorporate aQuantive and climb the ranks of online ad space the large advertising companies plan to spend 25% more for advertising on search engines (Wilcox, 2007).
The late arrival of Microsoft in the online advertising industry could also be a problem because the advertising dollars are heading in the direction of non PC gadgets such as the cell phone and digital music players. According to research conducted by ABI Research, “mobile advertising revenue will reach $3 billion by early 2008 and whopping $19 billion by 2011” (Wilcox, 2007). Microsoft is not well positioned in devices not related to the PC. The Zune offered by the firm is considered inferior to the Ipod and there is no cell phone to speak of. Microsoft was rumored to try to make a deal happen with Yahoo which fell through but Google is steadily improving their presence with the recent acquisition of DoubleClick. Microsoft presumably made a smart move in acquiring aQuantive because the market is simply too big to pass on but the smartest move would be to look past the current success of Google and Yahoo and find the next big tech related industry. The company will now spend the next several years trying to make the acquisition seem worthwhile while being left behind to figure out the online advertising game.
References:
Arrington, M. (2007, May 18). Microsoft pays $6 billion for aQuantive: Massive ad network consolidation is occurring. Retrieved April 23, 2007, from https://www.techcrunch.com/2007/05/18/microsoft-pays-6-billion-for-aquantive/
Microsoft Corporation (2007). Microsoft annual report 2007: shareholder letter. Retrieved April 23, 2007, from
https://www.microsoft.com/msft/reports/ar07/staticversion/10k_sl_eng.html
Microsoft Corporation (2007, May 18). Microsoft aquires aQuantive. Retrieved April 25, 2008, from
https://advertising.microsoft.com/uk/microsoft-aquantive-announcement
Wilcox, J (2007, May, 18). Why microsoft wrote aquantive a bog check . eWeek Microsoft Watch, Retrieved April 26, 2008, from
https://www.microsoft-watch.com/content/corporate/why_microsoft_wrote_aquantive_a_big_check.html