Thursday, September 10, 2015

MSFT Stock: Adallom Buy Is Another Smart Play in Microsoft M&A

Microsoft showing a dogged commitment to future in cloud, mobile services

Over roughly the past four years, Microsoft (MSFT) has acquired more than 30 companies. While the purchase price of many of those companies isn’t disclosed on Microsoft’s website, those that are add up to a whopping $20 billion.

The question, then, is whether that has been money well spent or squandered.

Given that the past year has been a bit rough for Microsoft stock, with shares down more than 7% and quarterly revenue down more than 5% year over year, the company’s most recent acquisition of cloud security firm Adallom for $250 million has some MSFT investors questioning its necessity.

MSFT’s Head in the Cloud, Feet on the Surface

Adallom is a cybersecurity firm specializing in the protection of cloud-based data and assets. Microsoft announced on Tuesday that its acquisition of Adallom has been completed.

Since Satya Nadella was appointed CEO on Feb. 4, 2014, the majority of MSFT acquisitions have involved cloud computing or smartphone development companies, such as New Zealand-based GreenButton, a high-performance cloud computing vendor; Acompli, a mobile email software developer based out of San Francisco; New York startup Sunrise Atelier, creators of “a next-generation calendar app for iOS and Android”; and Datazen, a Canadian mobile data analysis and visualization software developer.

In June, MSFT reportedly paid between $100 million and $200 million for 6Wunderkinder, a startup from Berlin credited with creating the Wunderlist to-do app. And, at the beginning of this year, Microsoft acquired the portion of Israeli-based digital stylus maker N-Trig that is responsible for developing the stylus used in Surface tablets.

From this small sample of recent MSFT acquisitions, it’s clear that Nadella is focused on the continued expansion of Microsoft’s presence in the mobile industry. Interestingly, sales of Surface tablets have been on the rise this year, seemingly due to a growing awareness of their comprehensive capabilities as 2-in-1 devices.

Over the past two years, sales growth of Microsoft’s Surface tablets has actually overtaken that of the Apple (AAPL) iPad; Surface revenue grew by 122% year over year, from $400 million in the first quarter of 2014 to $888 million in the first quarter of 2015. Conversely, iPad sales figures have decreased each of the past six quarters.

Actual unit sales of the Surface tablets are still only a fraction of iPad sales, but the fact that Apple’s product has been decreasing in popularity while Microsoft’s is on the rise seems to indicate a growing consumer trend that favors 2-in-1 devices.

Will the Recent Acquisitions Ultimately Benefit Microsoft Stock?

In short, yes.

Despite the fact that some of Microsoft’s acquisitions over the past several years have ended up being a gigantic waste of resources — e.g., in July, Nadella revealed that MSFT would be taking a $7.6 billion write-down on its September 2013 purchase of Nokia’s mobile division — some of the company’s acquisitions show solid potential for the future of Microsoft’s cloud and tablet divisions.

MSFT has purchased the companies responsible for making some impressive and popular smartphone apps, with the expectation that those apps will become standard on future iterations of its Surface tablets. With the recent addition of the company responsible for making the Surface tablet’s stylus, MSFT can now exercise greater control over the entire development process.

Further, several cloud computing and security companies now fall under the Microsoft umbrella, with Adallom being the newest addition to the family. By pooling their collective resources and capabilities, MSFT can expect to add attractive features and functionality to its cloud platform, Azure, keeping it in the race against Amazon (AMZN) and its popular Amazon Web Services solution.

One significant acquisition, however, is unlike the rest — last November, MSFT paid $2.5 billion to acquire Mojang, maker of the now-iconic Minecraft video game. At the time of the acquisition, Minecraft was one of the most popular games ever created and had been downloaded more than 100 million times since its 2009 release. More recently, the Washington Post reported that “more hours of Minecraft have been uploaded (to YouTube) than any other game.”

Since Mojang and Minecraft don’t seem to fit within the confines of Nadella’s cloud and mobile division priorities, the only plausible reason MSFT acquired the game-maker was to capitalize on its meteoric rise to record-breaking heights.

There have also been rumors circulating over the past several months that Microsoft has been eyeing up both BlackBerry (BBRY) and Advanced Micro Devices (AMD) as future acquisition targets. Neither of those rumors has been confirmed, but both companies could provide MSFT with even greater advantages in its goal to remain one of the top dogs of the tech industry.

Bottom Line

It’s difficult to determine how many of Microsoft’s acquisitions over the years have been fruitful versus how many have just become money-sucking holes in the ground.

But, with the right focus and sufficient capital to continue advantageous and synergistic acquisitions, Microsoft stock should eventually realize a benefit when the capabilities of the new companies are actually incorporated into next-gen MSFT products.

Article originally appeared on InvestorPlace (09/10/2015)

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