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Microsoft May Post Q4 Loss After Aquantive Write Down; Yammer Could Be Next

 July 05, 2012 10:59 AM

(By Mani) It seems Microsoft Corp. (NASDAQ:MSFT) is not getting the desired results in its online strategy as it expects to take a $6.2 billion noncash goodwill impairment charge in the June quarter associated with aQuantive, Inc., which the software giant had bought five years ago.

The charge would reduce the company's fourth quarter earnings, which is currently expected to be 62 cents a share. Assuming a share count of 8.49 billion as of March 31, the charge would shave off about 73 cents off the profit, suggesting that the company may post a loss of at least 10 cents a share.

Redmond, Washington-based Microsoft also expects lower revenue growth and profitability from the Online Services Division than previously thought.

[Related -Microsoft Corporation (MSFT) Earnings Preview: What To Watch In Q2 Results?]

These statements indicate there are some fundamental issues with Microsoft's online strategy that needs to be addressed if it needs to catch up with internet giant Google, Inc. (NASDAQ:GOOG) and other rivals.

Microsoft has always been an imitator as it acquired aQuantive after Google bought DoubleClick for about $3 billion to boost its presence in the online advertising space. Similarly, it agreed to buy Yammer after Salesforce and Oracle head started in the social computing space by acquiring rival companies.

[Related -Google Inc (GOOG): Why Nest Labs Deal Is A Wakeup Call For Apple Inc.?]

However, the problem is Microsoft ended up paying more for its deals as it paid $6.3 billion for aQuantive, compared to $3 billion spent by Google. This suggests that almost the entire amount spent by Microsoft gone in waters.

"MSFT strategy has always been to imitate the leader, which in this case is Google. This strategy worked well for MSFT in Desktop centric world, but fails in the Network centric world, where velocity of innovation is extremely fast…Size does not matter….Fast will always beat the Slow. MSFT has been in a perpetual catch mode with Google," Global Equities Research analyst Trip Chowdhry said in a note to clients.

The failure of aQuantive buy raises questions on the recent Yammer deal, for which Microsoft agreed to pay $1.2 billion in cash to the privately-held provider of social and collaboration solutions for the enterprise. The write-down of aQuantive business may worry investors that Yammer would also have the same fate.

Microsoft believes that with Yammer it would move closer to enterprises around the world, expanding the company's market reach and enhancing the broader cloud service portfolio with solutions like SharePoint, Office 365, Microsoft Dynamics and Skype.

However, iStock had indicated that Microsoft may be a bit late in joining the social party and should be able to withstand strong competition from Salesforce.com, Inc. (NYSE:CRM) and Oracle Corp.(NASDAQ:ORCL).

Microsoft may find difficult to compete with Salesforce.com's Chatter and Oracle's social relationship management tools, leaving no third slot left for Microsoft. It would also face competition from startups such as Jive Software Inc. (NASDAQ:JIVE).

There are many similarities between aQuantive deal and Yammer deal. First, Microsoft has vastly overpaid for both acquisitions – aQuantive and Yammer.

In aQuantive's case, Microsoft lacked insights into internet business and in Yammer's case, it lacked insights into Social Computing. In both the cases, Microsoft let off the first mover advantage, which is crucial in capturing the market share.

In addition, the innovation velocity of Google and Salesforce ar exceeds that of Microsoft in the internet and social computing space, respectively. In particular, Google's I/O event last week showed that its innovation is on an exponential trajectory in Maps, Augmented Reality, Search, Social, Cloud Platform, YouTube, Chrome, Android etc., and would be difficult for Microsoft to catch up with Google.



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