Is M&A the only way to Win?

In a brief Q&A at the Web 20. Summit Yesterday, Steve Ballmer said that Microsoft would be willing to acquire up to a 100 companies in the next five years. That' would spell out to be a spiraling acquisition game, which could wreak havoc on its financials. But more importantly, how does this fit in with the industry?

Microsoft has been the behemoth in the industry for the past 20 years, but many analysts point to a stagnant stock price and unpopular news media to make the claim that Microsoft may have matured. Compare Microsoft with Google, who's stock price has increased nearly 500% since it's Initial Public Offering in 2004. One way to compare the companies may be to look at sheer size alone, with the time-tested Microsoft boasting a market cap of $283 billion, and infant Google passing the $200 billion market cap mark just a few days ago. Do you think Google is big yet? Well, dig a little deeper and look at the number 3 and 4 search engines Yahoo and Baidu, who boast much smaller market caps of $38 billion and $10 billion, respectively. Most analysts are bullish on Google, while remaining neutral to the industry.

Some may ask how Google has grown so big? One way to answer this question may be to look at Google's acquisitions. Google has done a good job of acquiring horizontally related software development companies, acquiring more than 40 companies since 2001. This works out to approximately 7 companies a year. These companies have added significantly to Google's product line, including Youtube, Docs & SpreadSheets, Maps, and more. Maybe Microsoft sees small, innovative companies as the best method of increasing research and development? It does seem that way, especially if Ballmer wants to acquire 20 companies a year for the next five years. I predict that we will see higher P/E ratios indicating higher expectations for MSFT.

The real test will be if Ballmer can pick the right companies. Acquiring companies requires a lot of thoughtful planning, and acquisitions only work if the acquired company fits into the bigger picture of the acquiring company's strategy. Let's see how Ballmer does.

Link to Article:
http://blog.wired.com/business/2007/10/microsoft-wants.html