Decoding Microsoft’s M&A decisions
The software company’s latest deal is not like the others
It’s a fair question for the Microsoft chief executive. The software giant’s plan to buy Nuance Communications — whose speech recognition artificial intelligence technology powers Apple’s all-seeing virtual assistant — raises some questions.
It’s not that the software titan is new to mergers and acquisitions. It pulled off its largest deal in 2016, when it purchased the professional social media network LinkedIn for $26bn, followed by smaller acquisitions of GitHub, the online service used by some 28m software developers, and gaming companies ZeniMax and Minecraft. Nuance would be its second-largest ever purchase, at an aggregate value of $20bn.
But the deal does raise questions about Microsoft’s strategy.
The tie-up makes sense on some levels — Nuance and Microsoft were already partners, so combining will make it easier to tap into each other’s respective customer bases. But the numbers don’t quite add up, as the FT’s Lex column explains.
Nuance’s revenue dropped 3 per cent in 2020, yet Microsoft’s offer of $56 a share is more than twice what Nuance traded at before the pandemic. It’s a drop in the bucket for Microsoft, whose market capitalisation is almost $2tn, and has $50bn in net cash, but an odd bet nevertheless.
The AI group also shares little in common with Microsoft’s other recent targets. After playing host to a revolving door of activists over the years, including Carl Icahn, Nuance zeroed in on machine learning and natural language processing in the healthcare sector.
“AI is technology’s most important priority, and healthcare is its most urgent application,” Nadella tweeted on the logic behind the deal.
Microsoft has spent the past year chasing a mishmash of social media companies as a means to bring large-scale applications to its Azure cloud platform.
DD readers will be all too familiar with the Microsoft/TikTok/Trump saga from over the summer, but here’s a recap if you need one. Then in February, the FT revealed the software group had also courted the social media platform Pinterest, which currently enlists rival Amazon Web Services as its infrastructure provider.
Microsoft has also been in discussions to acquire the chat app Discord in a deal that would likely value the company well above its last private mark, DD has heard.
It’s unclear where Nadella’s latest emphasis on the importance of building out Microsoft’s healthcare cloud offering fits into that mix. And the pivot might draw more attention than he’s used to.
While Nadella is regarded more like a tech scion than a seasoned dealmaker, he’s been placing bets at a rate that would land any of his Silicon Valley peers at Amazon or Facebook in a meeting with regulatory authorities.
The play for Nuance will probably test the Biden administration’s appetite for allowing powerful technology companies to strike deals.