Tag Archives: M&A

From Value and Stock Performance and Apples and Oranges

Yesterday I wrote a few lines about the recent Microsoft Yammer deal for $1.2 billion. My point was that what Microsoft is lacking focus which would result in a big destruction of company value – much more than the premium they paid for Yammer. And today, I wanted to show a chart with the stock performance of Microsoft, Apple and maybe Google to underline my point here. But strangely enough, the chart doesn’t really work out. Microsoft’s stock isn’t actually doing that bad. So either I am wrong with my assumption that Microsoft lacks focus and thus destroys company value step by step or investors see things radically differently.

Or maybe it is not even a contradiction? What’s the story when you ignore the superficial data and dig deep into the fundamentals?

Superficial data cries to be compared to superficial data from others. We all love to compare and we will do it again later this year at the Olympic Games in London. We simply love to put things into perspective and do it almost every time.  We do it now with Jive Software, which sees its shares rise big time because of a comparison with Microsoft/Yammer. Jive Software is apparently in the same “space” so we compare. People and investors create “multiples” of superficial data like revenue, earnings, etc. to benchmark such ratios to similar companies and determine their value. That’s easy to do and they even look incredibly smart when they do that. It just has nothing to do with value.

Value is not superficial. Value is fundamental. The intrinsic value of a company is its continuous ability to solve one or more problems for which one or more markets require a solution. Focus is the ability of  management to secure the company’s capabilities and resources to solve market problems. Lack of focus is the contrary. These are qualitative measures. They cannot be compared. But they are actually the source of long-lasting company value and still they are largely ignored in investors’ metrics.

Value and stock performance seem to me like apples and oranges now and I wonder why I ever wanted to show a chart to underline my previous point. I’ll never try to do that again.

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Focus is unique, vital and creates value – Lesson learned, Microsoft?

I am always late with news and that’s why I don’t blog about news. Others are much better at that anyway. I am late with news because the news sensation doesn’t interest me that much. I am more thrilled to see what’s going on after the news broke. What comes after the big bang is more crucial than the actual bang. But much too frequently, the sensation dominates the web and its long-term impact is not of interest. That’s really dangerous, and it’s even existential.

Let’s take a recent example of huge news, the Microsoft Yammer deal for $1.2 billion. It’s been huge because the number is really big. And now stories go on and on if Microsoft’s decision was right or wrong and if they paid too much and why. All is followed by lively discussions on Microsoft’s strategy, motivation and odds for making this a success story. And Microsoft probably enjoys this unusual level of attention and feel good about it.

Truth is, every company has its own DNA, its own winning formula in its markets. This can change over the years and successful companies do change a lot. At the same time, they maintain their raison d’être.  Some call this corporate strategy, but I don’t like it.

I like to call it focus. Focus is unique, vital and creates real value.

If a company executes a losing corporate strategy but maintains focus, it will sooner or later correct this strategy. But if the company loses focus, it’s the worst thing that can happen. Losing focus really destroys value. Being focused also means always being proactive. Now, acquisitions generally look like the acquirer is very proactive. And here it get’s tricky. This might be true for some acquisitions, but sometimes, acquisitions are also either a result of being not proactive enough (you may also call it innovative) or, even worse, an alarming sign of lack of focus. And when I hear that Microsoft’s R&D budget is $9.6 billion of which 90% is directed to the Cloud and at the same time $1.2 billion is spent on acquiring a social enterprise networking company, I feel like Microsoft’s losing focus of what they are and want to be. Eventually, this will destroy a lot of value, much more in fact than overpaying a few hundred millions for an acquisitions.

That’s not the news Microsoft seems to focus on. But this will eventually have a bigger impact.

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