Can Microsoft make a sensible purchase?

Many tech journalists are repeating the report from The Financial Times that Microsoft is in the process of buying the mobile keyboard company SwiftKey for a price of $250 million. However, as is so often typical of the fawning Microsoft journalists, very few have been critical of the company’s move. Some have even hailed it as a great move, describing $250 million as a “relatively low purchase price”, that “indicates their new plan to be in Mobile”.

The claim that $250 million is a low purchase price can only come from the sort of teenage internet journalist that has yet to graduate from education and get a job in the real world. TouchType Limited, the company behind SwiftKey is overdue on their filings for 2015, but we do have their 2014 company filings to look at, and they’re not pretty.

SwiftKey analysis

They attempted to boost profitability of the company by making a number of structural changes, and changing their pricing model from an up-front cost to a “freemium”-style model, where the base application is free, and they then sell add-ons. This was not working well for them though – in 2014, their turnover had dropped from £9.9 million in 2013, to £8.4 million in 2014. Even more horrifying was the costs incurred with this restructuring. Having only made a slim profit in 2013 of £0.3 million, they made a loss of £5.5 million in 2014. Most of this loss was covered only by the cash reserves from equity investment raised in 2013.

If the company endured a year only even half as bad as their 2014 year, then it’s probably no surprise that their founders were looking to cash out to a big spender.

But if they’re struggling to even turn a profit, why are Microsoft forking over $250 million to buy them? Ostensibly, the wisdom goes that it buys them important AI programming talent, and it buys them IP related to AI. These, undoubtedly, are desirable things for Microsoft to own at the current time. I question however, whether that’s worth such a steep price. Certainly, I see no significant reason that the personnel should be a significant factor. Microsoft are not severely depleted of programming talent, even in the small but growing field of AI. Microsoft are also better placed than most of their competitors to recruit from universities in this field, given their strong investment in Microsoft Research, which regularly backs AI research. Even if SwiftKey’s development team was, for some unapparent reason, particularly desirable, even $10 million would be more than sufficient to poach the cream of the development staff. SwiftKey only has about 150 employees in total, so if taking the staff was the target, there are certainly cheaper ways to go about it.

Maybe the Intellectual Property argument is more valid, but there’s still little evidence to support that kind of asking price. SwiftKey did come fourth in Business Quarterly’s new Intellectual Property 100 league for UK companies, but this doesn’t rank companies by the value of their intellectual property, only by the rather nebulous criteria of “promoting a culture of innovation through the use of IP”. And while SwiftKey has filed 80 patents, only 4 have so far been granted, and none of them challenged. Indeed, SwiftKey’s been the recipient of a successful patent infringement lawsuit from WordLogic Corporation. This is hardly indicative of a lucrative intellectual property holder.

History

Microsoft, of course, is no stranger to poor deals. And they’ve been making a few high-value purchases of mobile application companies lately – Wunderlist (rumoured to be between $100 million and $200 million), Sunrise ($100 million) and Acompli ($200 million). If we extend back a little longer, and widen our scope to all acquisitions, their penchant for catastrophic becomes even clearer.

  • aQuantive – $6.4 billion; only for Microsoft to write off almost all that value a year later.
  • Danger – $500 million; most of the services they inherited were shut down, staff reassigned to Windows Mobile/Windows Phone.
  • Skype – $8.5 billion; still a going concern of some value to Microsoft, but mostly duplicated existing in-house software which has since been merged into Skype. Still doesn’t generate a profit individually, though there’s some question of a “halo effect”.
  • Yammer – $1.2 billion; used by Microsoft themselves within some teams, but hasn’t gained any external traction.
  • Nokia – $7.2 billion; most of the staff have been laid off (at great additional expense), there are continued questions as to the future viability of the unit.
  • Mojang – $2.5 billion; continues to grow, but shows no sign of being able to return that investment in any reasonable time-scale.

When Steve Ballmer left, we were told the age of large reckless acquisitions was over. Under Satya Nadella, we’ve not had the multi-billion acquisitions, I concede. Instead, we’ve had more frequent large enough acquisitions, and that gives cause for concern. Acquisitions should strengthen a company, providing new or expanded revenue streams. It’s doubtful whether the SwiftKey acquisition, or any of those I have mentioned, meet that criteria. Microsoft need to start spending their money more wisely and with greater prudence. Microsoft, like many large companies, was built on smart business decisions, buying low and selling high. If Bill Gates had paid over the odds for 86-DOS, then Microsoft wouldn’t exist today, and Windows would never have existed. Being a large company is no excuse – indeed, it means they have more leverage to negotiate a favourable deal, not less.