During today's conference call, Microsoft Corp. (Nasdaq: MSFT) planted its case for buying Visio Inc. (Nasdaq: VSIO) in an old-fashioned business bed:
Making money right now.
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"This is a very unusual deal for Microsoft in that it's not initially dilutive," Microsoft CFO Greg Maffei said. "This is first deal I can remember where it's going to pay its own way."
Visio's diagramming and design products work well with Windows and Microsoft Office. The company makes money, to the tune of a $9.6 million profit on revenue of $50.3 million in the third quarter. And it's cheap: the stock has been trading in the low 20s to mid 30s for what seems like forever. Shares closed yesterday at 33 1/2, which makes Microsoft's stock swap offer premium enough at roughly $43 a share, close to Visio's 52-week high.
Visio and Microsoft believe the former will get a boost from the latter's distribution. A few participants in the conference call wondered why Microsoft would buy an old-fashioned packaged software company when the world is moving toward the Web. But I agree with Maffei's answer: "If you look at the p(rofit)&l(oss) for Office and for Windows, these are tremendous businesses, and we fully expect these will be tremendous businesses, and we think they will fit in very well into that connected world."
Although sales of retail boxed software, corporate licenses are growing rapidly, because businesses still like what office productivity suites have to offer. One of the gems that Microsoft sees is the chance to get Visio into that setting; Visio currently has little in the way of large volume, business license deals. Maffei guesstimated Visio's current corporate desktop penetration at 20 to 25 percent of Office. "Could you imagine a penetration rate of half of the Office installed base? That would certainly be a worthy target for us, and one that I don't think is unachievable," he said.
Diss old-fashioned software all you want; just remember that the next time you fire off an e-mail message, it's probably being done on a machine with an Office suite on it. That's not likely to change for quite awhile.
Even if the much hyped Web productivity apps take off, Visio can help Microsoft. If you're a suspicious, paranoid sort, you might think Microsoft bought Visio mainly for the latter's recently announced Web software initiatives, to bolster Office against Sun Microsystems' Star Office suite. At the very least, Visio gets Microsoft onto the Web office rail sooner.
"What Visio provides is a superset to what Microsoft already has," says Jennifer Smith, senior software analyst with Dain Rauscher Wessels. "The desktop applications work seamlessly today with Windows and Office, and Visio has done a lot of work on a portal strategy. That portal strategy is the most interesting thing about their whole strategy."
Microsoft executives denied that Visio's Web efforts played any part in the strategic decision to buy, but of course they'll say that, since they don't want to draw attention to future plans until they're ready. And of course, Visio executives denied that their company's stagnant stock price had anything to do with their decision to approach Microsoft about a buyout.
Whatever. Either way, neither Visio nor Microsoft investors have much to complain about with today's deal.
Short of a muzzle, no one will ever be able to control Ellison behind a microphone. But Oracle's management should be able to do a better job of keeing quarterly earnings predictable. Is that short-term thinking? You bet, but guess what? Today's market is short-term oriented, and since Oracle is a publicly-traded company, it has some obligation to meet shareholder expectations.
Oracle says the nature of its business also means a certain degree of quarter-to-quarter unpredictability, because corporations don't like to sign large IT technology deals until the end of the quarter. That might be true, but other enterprise IT providers (hardware providers like Cisco, hybrids like IBM or even other software companies, like Siebel) have smoother quarterly patterns. The company will not manage earnings just to please the market, Henley said yesterday, taking a not-so-subtle shot at a certain Redmond, Wash.-based company often excoriated for doing just that.
But why not? What is a chief financial officer for, if not to manage the numbers? I'm not advocating that Oracle should do anything illegal, but if you can shuffle a few deals around, maybe ensure your sales force closes deals at certain times, why not do it? At the very least, Oracle could do a much better job of managing Wall Street estimates, as Microsoft does ("In typical Microsoft fashion, I am discouraging any of you from raising your numbers based on this," Maffei said during today's conference call).
Then again, tempering expectations may simply be impossible with Ellison.
Some have pointed out that AT&T plans for IP telephony are nothing new. But AT&T never got a huge boost even when it was news. Investors have been skeptical about Ma Bell's plans for TCI since the day it was announced. Only a twisted market can justify how AT&T, a profiteer with a solid record of reliability, deserves more doubt than historyless small cap like e-Net. Sure, e-Net is just a momentum toy today that's sure to drop back to reality in coming days; but that doesn't explain why "Internet telephony" is such a hot catchphrase in the first place, considering that the movement's single biggest proponent remains a market dog.
Market indices were generally negative in the afternoon. The Nasdaq Composite Index was down 33.77 to 2834.52, the S&P 500 lower by 8.69 to 1327.60, and the Dow Jones Industrial Average down 32.93 to 10877.40. 22GO>