REV: NOVEMBER 6, 2001
In the fall of 1994 William Gates, chairman and CEO of Microsoft Corp., was considering the possible acquisition of Intuit Corp. Intuit marketed the leading personal finance software product called Quicken. Two years earlier Gates had met with Scott Cook, chairman of Intuit, to discuss the possibility of completing an acquisition. In the interim, Cook had further consolidated Intuit’s domination of the personal financial software market with the acquisition of a firm which marketed the best-selling personal income tax preparation software called Turbo Tax, and the acquisition of a firm which provided electronic bill-payment ...view middle of the document...
During the course of discussions with Scott Cook spanning the past two or three months, Bill Gates determined that a deal could probably be done with an exchange ratio of $70 to $75 in Microsoft stock for each share of Intuit’s stock outstanding or under option.
1This acquisition followed a private bidding war in which Lotus reportedly first bid $700 million for WordPerfect. Ultimately
Novell won with an offer of about $1.4 billion in Novell stock. ________________________________________________________________________________________________________________
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The size of the transaction would thus be about $1.5 billion, and the price would be more than 1.7 times Intuit’s current price of $42 per share. Now Bill Gates had to decide whether to 1. 2. pay $1.5 billion for a firm with total annual revenues of less than $200 million (Exhibit 3); gear up to compete more aggressively and more effectively in these markets in an effort to repeat the kind of success that Microsoft had enjoyed in the word processing and spreadsheet market niches; or continue as a marginal player in the niches dominated by Intuit while focusing Microsoft’s efforts in other (perhaps more important) markets of the future.
The Challenge Facing Microsoft
In the fall of 1994 Microsoft was the most profitable large public corporation in the world. Over the prior nine years the firm had achieved a return on equity which averaged 100% (line 77, Exhibit 4).2 The firm’s annual compounded rate of revenue growth over the same time period equaled 47%. While Microsoft's profitability had been remarkably stable over the years, its rate of growth in revenues had declined somewhat over the last two years, falling to ”only” 24% in fiscal 1994 (line 78, Exhibit 4). Given Microsoft's remarkable stock price (Exhibit 5), this declining rate of revenue growth was a cause of concern. Microsoft dominated two critical segments of the personal computer market....