Microsoft's $6.2 billion M&A lesson

Microsoft’s biggest play in the internet market has ended up as a $6.2 billion dud, but has the software giant learnt from its mistakes?

Microsoft’s biggest play in the internet services market and online advertising has ended up a dud, a $6.2 billion dud, which will most likely wipe out the software giant’s profit for the company's fiscal fourth quarter.  

While market reaction to Microsoft’s aQuantive mea culpa has been decidedly muted, there is little doubt that Microsoft’s shareholders will be hoping there are no repeats of this disaster.

After all, Microsoft has made even loftier purchases since spending $6.3 billion on aQuantive in 2007, with the $8.5 billion acquisition of Skype in May last year. The software giant has also recently paid $1.2 billion for social media platform Yammer.

Buying the online display advertising firm was meant to be the first plank in Microsoft’s strategy to take the fight to Google. The software giant said at the time of the deal that allowed it to strengthen relationship with advertisers, agencies and publishers and enhance its “world-class advertising platform.”

Since then Microsoft has forged a partnership with Yahoo, making Bing the search engine on Yahoo websites and last year set up an advertising partnership with Yahoo and AOL to allows each of the companies to sell each other's unsold premium advertising inventory, or display ads.

However, the software giant’s ambition to cut Google’s lead in the space remains patently unfulfilled, despite its best efforts. The online services division, which contains aQuantive, Bing and MSN, is still not firing. The division posted an operating loss of $1.4 billion in the first three quarters of its current fiscal year and Microsoft has downgraded its growth and profitability outlook for the unit.

Bing currently maintains a 15.4 per cent share of the search market, up from 8.4 per cent when it launched but most of that growth has come at the expense of Yahoo and let’s not forget that Bing is still the default search option in internet explorer. Google is still the king of the castle with a 66.7 per cent share of the market and that lead isn’t disappearing in a hurry. To add further insult to injury Google’s $3.2 billion purchase of aQuantive’s rival DoubleClick in 2007 has seemingly borne fruit. Google last year earned $9.7 billion from online ads while Microsoft’s online services division has never made cent in profit.

Microsoft took an expensive punt on aQuantive and it hasn’t paid off but the more pressing question right now is whether it has learnt its lesson. Realistically, the software giant is always going to carry the burden of its poor M&A track record but the market will be keeping a close eye on whether Skype and Yammer fare better than aQuantive.

Focus, or lack thereof, is a critical piece of this overall puzzle. Microsoft’s critics have often railed that the company had lost its focus in its bid to beat Google in its home turf, by moving away from the core enterprise space. There are indications that perhaps Microsoft is realigning its attention in the space that it knows best, Skype has the potential to become an integral part of Microsoft’s enterprise offerings, while Yammer is aimed squarely at businesses.

In addition, Microsoft now has a new-found ambition in the hardware space with the ‘Surface’, which has the potential to capitalise on the mobility and BYOD trends currently sweeping through enterprises.

Of course just how successful Microsoft will be in making the most of this potential remains to be seen. A slow integration process has been a constant feature of Microsoft’s poor M&A legacy and the aQuantive was no different. By the time the ad firms features had been fully integrated into Bing, Google had already moved on. In a world which rewards agility and swiftness Microsoft cannot afford to take its time with Skype and Yammer.   

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