Don Dodge organized a meeting with a number of Boston venture capitalists and Chris Liddell yesterday.
It was the first time I met Chris. He’s quite impressive and very likable. I had the pleasure to work with Greg Maffei who was the CFO at Microsoft when they acquired WebTV Networks. Greg is now running Liberty Media.
Chris was very open with us. He shared a number of things about how and when they buy companies.
0 - It all starts with the product teams and/or Dan’l Lewin’s group that works with startups. Corporate development is now decentralized across all of those business units so they can make decisions best for them.
1 - Microsoft uses M&A as a way to increase market share or leadership in an area that they are currently in but aren’t necessarily the leader. For example, they don’t acquire many companies that are client software related. On the other hand, they have been acquiring plenty in search, online advertising, business solutions etc.
Someone asked Chris if MSFT would acquire a company to get into the Kindle business or a completely new area. Chris said that wasn’t their strategy.
2 - Microsoft roughly acquires 15-20 companies per year. They are agnostic about stage or revenue. They have a negative bias about open source. They don’t seem to have an allergy if the technology is based on a competitive platform. He mentioned a number of large acquisitions they made that were based on competitive platforms.
3 - Microsoft spends roughly $10B per year on R&D and roughly $2B per year on acquisitions. One VC asked if they should buy more companies to move the stock price (since it’s been flat for a long time) hinting that R&D wasn’t working that well. Chris indicated that they are happy with the current ratio.
4 - Chris discussed their recent decision to take on debt for the first time in the company history. He said it was compelling and jokingly shared that it took him awhile to convince Billg and Ballmer that it was the right thing to do. They are borrowing at about 2.5% for up to 30 years. They wanted to have more liquidity in the US (much of their liquidity is overseas) so he wanted to balance that. They could very well buy back their stock as well which has been attractive to the company.
(I remember back in 2004, I was deciding between joining Apple or joining up with Todd & Santo to start Spark, how proud Apple was about retiring all of their debt. It’s interesting to compare how the Apple & Microsoft look at cash, M&A, R&D, stock price, dividends, etc so differently)
5 - Chris said they were on track to buy 20 companies last year but then the market crashed and they didn’t see anything they wanted to acquire given the valuation expectations. He felt that valuations in the public markets had come down but private valuations hadn’t.
I told him that it could be that many startups that want to sell at “the corrected valuations” (ie lower) may be a self selected group wit issues. And the ones that are keeping expected valuations higher are actually stronger companies (in terms of growth, capital efficiency, market leadership etc) and with stronger investors behind them.
It was a very good & interesting meeting. Regardless if you are an Apple user (me) or open source supporter (me again), you gotta give Microsoft a lot of credit. They are an amazing company with huge scale and profits. But they also have their fair share of challenges.
Thanks to Chris and Don for hosting and letting us join the discussion.
(disclosure: I asked Don in advance if I could share this info in a blog post. He said yes :)