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Accounting Essay

8257 words - 34 pages

9-295-121
REV: NOVEMBER 6, 2001

Microsoft/Intuit
The Decision
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. ________________________________________________________________________________________________________________
Professor William E. Fruhan prepared this case which was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 1995 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

This document is authorized for use only by Hanxiao Wen (wenhanxiaao@163.com). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies.

295-121

Microsoft/Intuit

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.

3.

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....

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