Don Dodge on The Next Big Thing

Microsoft proposes acquisition of Yahoo for $31 share

Microsoft has proposed acquiring Yahoo! for $31 per share in stock or cash which values the company at $44.6 Billion, a 62% premium to Yahoo's stock price on the eve of the announcement. Techmeme has LOTS of stories and blogs about the proposal.

Microsoft has been in serious discussions with Yahoo off and on for about two years. Henry Blodget, and many others have written many times about possible scenarios with Microsoft and Yahoo. But, two things to remember. First, this is an offer to acquire, which Yahoo's board and shareholders need to approve. Second, the regulatory authorities in the US and Europe must also approve.

Microsoft believes this proposed combination would receive all necessary regulatory approvals and expects that the proposed transaction would be completed in the second half of calendar year 2008.

Microsoft is also committed to working closely with Yahoo! management and its Board of Directors as they, along with Yahoo! shareholders, evaluate this compelling proposal.

Microsoft released the contents of a letter from Microsoft CEO Steve Ballmer to Yahoo's board of directors. Here is the letter in its entirety;

January 31, 2008

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Roy Bostock, Chairman
Attention: Jerry Yang, Chief Executive Officer

Dear Members of the Board:

I am writing on behalf of the Board of Directors of Microsoft to make a proposal for a business combination of Microsoft and Yahoo!. Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock. Microsoft would provide each Yahoo! shareholder with the ability to choose whether to receive the consideration in cash or Microsoft common stock, subject to pro-ration so that in the aggregate one-half of the Yahoo! common shares will be exchanged for shares of Microsoft common stock and one-half of the Yahoo! common shares will be converted into the right to receive cash. Our proposal is not subject to any financing condition.

Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008. The implied premium for the operating assets of the company clearly is considerably greater when adjusted for the minority, non-controlled assets and cash. By whatever financial measure you use - EBITDA, free cash flow, operating cash flow, net income, or analyst target prices - this proposal represents a compelling value realization event for your shareholders.

We believe that Microsoft common stock represents a very attractive investment opportunity for Yahoo!’s shareholders. Microsoft has generated revenue growth of 15%, earnings growth of 26%, and a return on equity of 35% on average for the last three years. Microsoft’s share price has generated shareholder returns of 8% during the last one year period and 28% during the last three year period, significantly outperforming the S&P 500. It is our view that Microsoft has significant potential upside given the continued solid growth in our core businesses, the recent launch of Windows Vista, and other strategic initiatives.

Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that “now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction.” According to that letter, the principal reason for this view was the Yahoo! Board’s confidence in the “potential upside” if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:

Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.

Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.

Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.

Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

We would value the opportunity to further discuss with you how to optimize the integration of our respective businesses to create a leading global technology company with exceptional display and search advertising capabilities. You should also be aware that we intend to offer significant retention packages to your engineers, key leaders and employees across all disciplines.

We have dedicated considerable time and resources to an analysis of a potential transaction and are confident that the combination will receive all necessary regulatory approvals. We look forward to discussing this with you, and both our internal legal team and outside counsel are available to meet with your counsel at their earliest convenience.

Our proposal is subject to the negotiation of a definitive merger agreement and our having the opportunity to conduct certain limited and confirmatory due diligence. In addition, because a portion of the aggregate merger consideration would consist of Microsoft common stock, we would provide Yahoo! the opportunity to conduct appropriate limited due diligence with respect to Microsoft. We are prepared to deliver a draft merger agreement to you and begin discussions immediately.

In light of the significance of this proposal to your shareholders and ours, as well as the potential for selective disclosures, our intention is to publicly release the text of this letter tomorrow morning.

Due to the importance of these discussions and the value represented by our proposal, we expect the Yahoo! Board to engage in a full review of our proposal. My leadership team and I would be happy to make ourselves available to meet with you and your Board at your earliest convenience. Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.

We believe this proposal represents a unique opportunity to create significant value for Yahoo!’s shareholders and employees, and the combined company will be better positioned to provide an enhanced value proposition to users and advertisers. We hope that you and your Board share our enthusiasm, and we look forward to a prompt and favorable reply.

Sincerely yours,

/s/ Steven A. Ballmer

Steven A. Ballmer

Chief Executive Officer

Microsoft Corporation

Internet Advertising spend sets another record

The Internet Advertising Bureau announced today that Internet advertising revenues exceeded $5.2 billion for the third quarter of 2007, representing yet another historic high for a quarter and a $1.1 billion increase, or 25.3 percent, over Q3 2006.

This is why Microsoft acquired aQuantive , an online advertising and marketing company, for approximately $6 Billion in cash. aQuantive is primarily known for its three brand names; Atlas and DRIVEpm for advertisers and publishers, and Avenue A / Razorfish, one of the largest online ad agencies.

Huge growth ahead - The forecast calls for continued growth, doubling in the next four years. Today less than 10% of all ad spending is allocated to online advertising. Newspapers, magazines and TV are just starting to feel the pinch of advertisers moving more of their ad budget online. Newspapers lost $3.1 Billion in ad revenues last year...mostly to online ads.

Skype joins the list of "Worst Billion Dollar Acquisitions of All Time"

eBay says they will take more than $1 Billion dollars in write downs on their purchase of Skype. Henry Blodget says it is more like $1.4 Billion. They also announced that Skype founder CEO Niklas Zennstrom is leaving. This is the worst kept secret in the industry. He has been working on other projects for quite a while.

I wrote a post "The 10 Worst Billion Dollar Internet Acquisitions of All Time" Skype didn't make the list at the time because it was too early to tell. Not anymore. It takes a spot very high up on the list. AOL, Lycos, and Excite are still the clear leaders in this dubious category.

There are several other candidates for the worst acquisitions of all time that are still too early to call...but the trends look pretty clear. What are your picks for possible additions to the list? Remember, it has to be at least a billion dollar blunder or it doesn't count.

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Parlano MindAlign group chat service acquired by Microsoft

Microsoft announced the acquisition of Parlano, maker of MindAlign, a group chat collaboration service. MindAlign makes it easy for groups of people to form around a topic, discuss it in real time chat (IM), and save the discussion for future reference. Stock market traders use MindAlign to share fast moving market information with their colleagues and quickly form trading strategies. ComputerWorld says;

The application is used by large financial services companies, including Deutsche Bank and UBS, so employees in major cities around the world such as Paris, London, Tokyo and New York can keep track of chat discussions on specific topics that may have occurred even when they were not in the office.

The Emerging Business Team has been working with Parlano for three years to establish a strong Microsoft partnership. First with introductions to the Microsoft Office product groups, and later by including Parlano in marketing campaigns, trade shows, product demos, and partner success stories.

Parlano is another good example of a partner relationship building over time and culminating in an aquisition. Many Microsoft acquisitions start out as partner relationships. Most of you know I worked at Groove Networks (collaboration) where we had a long partner relationship with Microsoft, that again resulted in a mutually benefical acquisition. Onfolio (web research) and Softricity (virtualization) are other examples from the Boston area.

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CBS acquires Last.fm, eBay buying StumbleUpon

Acquisitions are being announced every day now. CBS, the TV network, will acquire Last.fm, the streaming music service. eBay, the auction company is buying StumbleUpon, a social bookmarking service. A while ago eBay bought Skype, a free VoIP telephone service.

Acquisitions are usually about synergy, market share, cost savings, leverage, or strategic moves into new markets. Hmmm...what will CBS do with Last.fm? And what will eBay do with StumbleUpon? The synergy isn't obvious to me now, but acquisition strategies play out over many years.

My good friend Ashkan Karbasfrooshan over at HipMojo wrote a brilliant piece today on the music business and acquisitions in that space. Ash suggested that Apple should acquire one of the major music labels. His analysis of the traditional music business versus the online music business was interesting. But, his financial analysis of the stock market implications of such a merger really made me stop and think. Think about this excerpt from the HipMojo post;

How Much Would Owning the Music Add to Apple’s Bottom Line?

Say the percentage of WMG (Warner Music Group) and indie songs sold is actually 25% (and not 33%), that represents 500M songs, which at $1 would help retain $500M in profits for Apple...Using the example above where a company buys the indies and smallest major record label for about $3B would add $500M in profits, which would in turn add 500M x 35 P/E = $17.5B in market value for Apple

So, if Ash's estimates are correct, Apple could buy Warner Music for $3B and the stock market would immediately reward Apple with an additional $17.5B in market cap. Now that is a deal that would make an investment banker smile.

Companies with high Price/Earnings ratios should buy companies with lower P/E ratios. From a financial point of view this makes obvious sense. However, most acquisitions are not done with financial engineering in mind. They are done for strategic reasons. And usually the tables are reversed. The big companies with lots of cash and low P/Es are acquiring the small hyper-growth companies with astronomical P/Es.

Music, television, and radio companies have low P/E ratios and stock market caps compared to technology companies.  Entertainment content is mashing up with technology as digital distribution of music and video move to the Internet. We have seen this coming for a long time. Steve Case saw it when he merged AOL with Time Warner. It was the classic high P/E technology company acquiring the low P/E content company. It was too early in the evolution and the synergies didn't materialize.

Maybe the time is now right for traditional content companies to merge with technology companies. CBS and Last.fm may be the first of many such mergers.

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Bill Gates predicts hard times for traditional media advertising

The Seattle Times covered Bill Gates speech at Microsoft's Strategic Account Summit 2007, a gathering of Microsoft's top global advertising customers. Bill made the case for Microsoft's AdCenter, and predicted hard times ahead for traditional media advertising. Here is a link to a webcast of Bill's speech. (Picture courtesy of CNET Networks)

"We're saying newspapers will go online, and there will be massive innovation that comes out of that. We're saying that TV, the biggest ad market in the world, will completely go online and have the kind of targeting interaction that you only get out on the Web today," he said. "As dramatic as things happening on the Web are, that's actually what all advertising ... will be in the future." "I have a lot of friends in the newspaper industry and, of course, this is a tough, wrenching change for them because the number of people who actually buy, subscribe to the newspaper and read it has started an inexorable decline."

You might recall a quote from my blog last year "Are newspapers and magazines dying?"

At its peak in 2000, The Mercury News had a Sunday circulation of 326,839 subscribers, according to the newspaper. Last September, the company counted 278,470 Sunday subscribers, a drop of about 15 percent. Revenue from the company's help-wanted ads fell to $18 million a year from more than $118 million, according to the paper. The newsroom was whittled to 280 people from 404, a 30 percent decline.

The Seattle Times story included these statistics "

Advertisers will spend about $445.5 billion globally in 2007, according to ZenithOptimedia's most recent quarterly forecast. Of that, online is expected to get 7 percent of the pie compared with newspapers' 28.3 percent. By 2009, online is forecast to grow to 8.7 percent, while newspapers' share dips to 27 percent.

I was surprised by the ZenithOptimedia predictions, and expect the transition to online advertising to move much faster. However, every 1% of market share is worth $4.5 Billion so it is a lot of money no matter how you slice it.

Here is another Gates quote from the Seattle Times story;

The traditional Yellow Pages are doomed as voice-activated Internet searches combined with on-screen interfaces on smart mobile devices get better and proliferate, Gates said. The company's recent acquisition of voice-technology provider TellMe is accelerating the trend.

Microsoft's recent acquisitions of MotionBridge and Screentonic, coupled with the acquisition of TellMe will support Gates vision of search and advertising on smart phones.

Newspapers and magazines are the first traditional media to feel the pinch from web based advertising, but it will eventually affect radio and television as well. Traditional media is not going away and will not be totally disrupted by web advertising, but growth and profit margins will be adversely impacted. There is plenty of time for traditional media to adjust and take advantage of the shift. Sadly, few will do so.

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I'll trade my two $50K cats for your $100K dog

Michael Arrington thinks Photobucket was a steal at $250 Million versus YouTube for $1.65 Billion. Maybe...and maybe not. It is hard to apply standard valuation metrics to these companies with free services and very little revenue. Michael lays out comparisons between the two deals that seem logical.

I grew up in Maine, and I am reminded of the negotiations between two farmers from Maine at the county fair. One farmer was showing off his "blue ribbon" dog and proposing to sell it for $100,000. The other farmers were laughing hysterically at the idea of a $100K dog. Dogs don't produce income. How could a dog be worth $100K? Then one farmer stepped up and offered to trade two of his $50,000 cats for the $100K dog. The dog owner quickly agreed and bragged to all his friends how he sold his dog for $100K.

Acquisitions that are done as stock swaps are obviously not the same as cash transactions. Public companies often use their stock as trading currency for acquisitions since it has no cash impact on their business. However, stock transactions dilute the value of other shareholders, sometimes significantly. In a rising stock market no one really notices because the steady share price increase masks the dilution. When the stock market turns the problems are exposed...and magnified.

It will take several years to see how these acquisitions really work out. Success depends on how the new owners leverage the new properties, find synergies with their existing products and services, and monetize the user traffic. The value of acquisitions is always about what you can do with them in the future, in the context of your business, not about applying standard multiples to existing revenues and profits.

The concepts of synergy and leverage are simple enough to understand. Translating those concepts to $250M of bottom line profit, or $1.65B, are not so simple. Top tier Internet growth companies can make about 33% profit on each dollar of sales. So, triple the acquisition price to get to the revenues needed to break even. It is a tall order for free services layered on top of other free services.

At some point the end user of all these free services is the same user and they can't be monetized any further no matter how many new services are added. Advertisers will eventually figure this out. Ad rates will drop. Revenues will drop...and stock prices will drop. It is all about the stock price. No one cares about real revenues and earnings as long as the stock price is high.

When stock prices drop everyone along the chain starts to rethink their assumptions about value and ROI. The changes ripple all the way back up the food chain. The individual stockholders get more conservative and move out of bubble stocks. The Internet companies stop acquiring because their stock price has deflated. The entrepreneurs stop agreeing to acquisitions because the rewards are less. The VCs stop funding new startups because the risk/reward ratio doesn't work.

We have seen this before. It was the nuclear winter that lasted from 2000 to 2003. It is amazing how quickly we forget. As I always say "fear is temporary...greed is permanent".

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Deal or No Deal? The psychology of making deals

Google shelled out $3.1 Billion in cash for DoubleClick. A few weeks ago Cisco paid $3.2 Billion for WebEx. Warren Buffett built Berkshire Hathaway by acquiring companies, and amassed the second largest personal fortune in the world. The popular TV game show "Deal or No Deal" provides some insight into the psychology of making deals; emotion versus logic, and fear versus greed. The same psychology plays out in corporate deals. Closing a deal is easy, making it pay off is hard.

Corporate acquisitions certainly involve strategy, financial analysis, competitive assessment, build versus buy questions, and lots of "due diligence" exercises. After all of that is done it still comes down to a few key executives making a "gut level" decision on price. The strategies can line up and all the answers can come back "yes" but in the end someone has to decide how much to pay. A deal can make strategic sense, but at some point it doesn't make financial sense. In most cases the real results are not known until five or ten years after the deal is done.

The Short Term. The analysts and pundits give instant analysis and prognostications. Interesting but usually myopically focused on the details. Here is something to ponder. Cisco could have acquired WebEx four years ago when the stock market valued Web-Ex at $600 Million. Why did Cisco wait four years and pay $3.2 billion? DoubleClick was a publicly traded company two years ago and valued at less than $1 billion. Anyone could have acquired  DoubleClick, but a private equity firm took them private less than two years ago for $1.1 billion. They later sold off two divisions for $525 million. Yesterday Google paid $3.1 billion for what remained of DoubleClick. Why did Google wait two years and pay billions more? Did Cisco and Google make the right financial decisions? It depends on how they leverage the technologies and the decisions they make over the next five years. They could turn out to be reasonable deals.

The Long Term. Some deals make sense immediately, but most deals take years to play out. The true value of deals hinges on what you can do with them once they are part of your company, not what they are doing today. Leverage and synergy is what makes a  $100M acquisition today worth a billion five years later. Small acquisitions ($50M to $100M) are easier to integrate, easier to leverage and find synergy, and carry less risk if they fail. Everything is harder with a billion dollar acquisition. All the same logic and opportunities are there for big deals and sometimes they pay off, but there is a long history failures. It is just a matter of scale. See my earlier post "The top 10 worst billion dollar acquisitions of all time".

Deal or No Deal? The popular TV show starts with 26 briefcases, all with a dollar amount between $1 to $1M inside. The contestant picks one briefcase as their own and then proceeds to open the remaining cases. As the amounts are revealed they are asked to accept a deal to walk away without going further. They start by opening 6 cases. After they are opened a "banker" looks at the amounts already opened and off the table, and calculates the odds on all the remaining cases, and offers an average amount to the contestant. Almost invariably the contestant gets greedy, refuses the deal, and takes their chances on opening four more cases. More amounts are revealed and the bankers offer goes up or down based on the remaining amounts in play. The banker works on logic and probabilities. The contestant is usually working on emotion and competitive spirit.

Warren Buffett is logical...and he has made more money investing and acquiring companies than anyone else in the world. Big acquisitions make headlines but rarely payback on the bottom line. Warren Buffett made his money on boring businesses like insurance, manufacturing, retailing, consumer products. He never over pays for acquisitions and has a lot of patience for making his acquisitions pay off.

Which approach is right? They both work if you stick to your strategy and don't violate your own rules. Acquisition deals get very competitive. Emotions run high. Decisions must be made quickly with incomplete information. Even the best executives sometimes succumb to emotion, competitive spirit, and ego in high pressure situations. That is when they over pay and make mistakes.

Poker players bluff...competitors do too. I have watched poker tournaments where players are faced with tough decisions. They aren't sure what their opponent is trying to do, or what cards they hold. The good players have already established rules for what to do in these situations. They write them down to remind themselves so that emotions don't cloud their judgment. Warren Buffett never wavers. He may pass on a deal now and then but he rarely makes a mistake. Business executives would be wise to do the same.

Entrepreneurs face some of the same tough decisions. Should you take VC money now or wait for a better valuation? Should you accept an acquisition offer or go it alone for another year or two? Should you invest the time and money in a new product or improve what you already have? Should you hire that high priced executive or grow an internal employee? These decisions are every bit as strategic and difficult as the billion dollar acquisition decisions. It is just a matter of scale. The difference is that big companies can make huge mistakes and not even feel the pain. Startups make life or death decisions every day. One big mistake and they are dead. That is a big difference.

At the end of the day a start-up entrepreneur and a Fortune 500 CEO are very much alike. They both make tough decisions and rely on gut level instincts. The difference is that the results of these decisions are felt instantly in a startup and aren't know until 5 or 10 years later in a big company.

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Warren Buffett on newspapers - Why Mark Cuban would buy the Chicago Cubs, but not the Chicago Tribune

Warren Buffett is the most successful investor of all time and the second richest man in the world. Buffett is the chairman of Berkshire Hathaway and each year he publishes a letter to shareholders.  Thanks to Brad Feld for the pointer to the letter.

Yesterday I wrote about the demise of newspapers, music, and video. Buffett's letter to shareholders includes a lengthy section on newspapers. When the "Oracle of Omaha" speaks...every investor should listen.

Here are the "golden nuggets" I found while reading the section on newspapers;

• If you want a reputation as a good businessman, be sure to get into a good business.
• Advertisers prefer the paper with the most readers, readers prefer the paper with the most pages and ads. (This is why Google gets most of the ad revenue)
• Rich people used to love to own newspapers and sports teams. Now sports teams are the better choice.
• If cable TV and the Internet came first, there probably never would have been newspapers.
• Only a combination of print and online ads will ward off doomsday for papers.
• The days of lush profits for newspapers are over.

The economics of the newspaper business are being disrupted by the Internet. Conversely, the Internet provides a whole new revenue stream for sports teams. This is why Mark Cuban would consider buying the Chicago Cubs...but never the Chicago Tribune.

Note to subscribers: This is the third time I have written this post. TypePad has inexplicably lost it the previous two times. This is why you might get a feed with nothing but the title. Sorry, but I have no idea what went wrong.

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Did Cisco pay too much for Web-Ex? Did Microsoft make the right choice acquiring Placeware?

Corporate acquisitions make fascinating business case studies. Cisco recently announced an acquisition offer of $3.2 Billion for Web-Ex, a NASDAQ traded company (WEBX). For most of the past 12 months Web-Ex has been trading between $35 and $40 per share for a total market cap of between $1.75B and $2 Billion. Just four years ago the stock market valued Web-Ex at $600 Million. Web-Ex went public in July of 2000. Cisco is paying a pretty big premium to get Web-Ex. Is it worth it?

Microsoft acquired Placeware, the second most popular web conferencing company, in April of 2003 for somewhere around $200 Million, at a time when Web-Ex, the industry leader, was valued at $600M. Of course there would have been a takeover premium of 20% or more, so figure Web-Ex could have been acquired for $750M. So which was the better deal then, and now?

Should Microsoft have acquired Web-Ex for $750M or Placeware for $200M? Well, the first answer is that Cisco could have acquired Web-Ex for $750M four years ago too...but decided to pass. Why would Cisco pass at $750M and 4 years later acquire them for $3.2B? It could be as simple as they had other priorities at the time.

Microsoft viewed web conferencing as a component of a full collaboration suite consisting of E-mail, Instant Messaging, file sharing, and Voice over IP. Web-Ex saw it as a stand alone application. The strategic view makes a big difference in the value you place on the asset. Microsoft got what it wanted out of Placeware. It became the integral part of what is now called Live Meeting, a reasonably successful product for Microsoft.

Business model match ? - Microsoft's business model is to sell software products for a license fee. Web-Ex was all about selling a hosted service on a dollars per minute basis. This is a great business model but it didn't match with anything else Microsoft was doing, and certainly didn't fit with the Microsoft Messenger / Live Meeting strategy of the time. It was probably easier to acquire Placeware for $200M and make it fit the Microsoft model than it was to spend $750M for Web-Ex and not optimize their existing revenue model.

Cultural fit? Believe it or not, this is a very important consideration. Placeware moved all its people to Redmond where they could work with the rest of the Microsoft team to develop an integrated product suite. Perhaps the key people at Web-Ex were not willing to move from Santa Clara. People are a huge part of the value of an acquisition. If you can't keep the key people or get them to move where you need them...the acquisition loses its value rapidly.

Microsoft made the right choice. Given the strategic objectives, product plans, business models, and cultural fit, Microsoft made the right choice in acquiring Placeware. Financially, the $200M price tag fit the model, and cost $3 Billion less than Web-Ex.

Did Cisco make the right choice? Yes, I think Web-Ex makes sense for them. They paid a lot more than they would have four years ago, but in the long run it will probably work out. But why didn't they save several billion dollars and acquire them earlier? Good question, but my guess is that Cisco was not looking to get into this business four years ago. Cisco stayed pretty close to its networking roots. Lately they have made a big push into communications with VoIP phones, video, and now web conferencing. Sometimes it just takes a while for all the pieces to come together in the right place and time.

Stock market metrics? From a purely financial point of view this is hard to swallow. Today the stock market values Cisco at a P/E of 25 times earnings. They are buying Web-Ex for about 60 times earnings. Unfortunately Web-Ex's revenues ($380M) and earnings ($48M) will not materially effect Cisco's numbers, $28.5B and $5.6B respectively. So, the stock market will apply Cisco's P/E to Web-Ex's numbers for an immediate market cap loss of about $1.7 Billion dollars, or about 1% of Cisco's current $160B market cap. Not to worry, If Cisco can crank up the revenues and profits from Web-Ex and leverage their other communications investments the stock market will reward them...far beyond the purchase price.

Contrast this acquisition with Google's $1.6 Billion dollar acquisition of YouTube. Sorry, but I can't make any sense of those numbers. Add on the billions of dollars in licensing fees to TV and film studios, and billions more in lawsuit settlements to Viacom and others. Well, you get the idea...Cisco looks like a genius in comparison.

What do you think? Did Microsoft make the right choice? Did Cisco pay too much? Acquisitions are all about what you will do with them in the future...not what they are today. What do you see happening in the future? Leave a comment and join the conversation.

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