Despite Microsoft's announcement today that it has purchased Valence Research, the software giant has greatly slowed the pace of its acquisitions during the past two years as compared with the pace of its investments.
"Clearly, they are very sensitive to the DOJ and the appearance of trying to create a lock in markets that would keep people out," said Michael Stanek, a Lehman Brothers analyst. "Instead, they are making investments in companies with technology-sharing arrangements."
David Readerman, an analyst with NationsBanc Montgomery Securities, agreed that the government investigations may have prompted Microsoft to restrain itself from buying more companies and favor investments instead.
But he added: "It may also come down to valuation. Entrepreneurs may have a value of what they think their company is worth and Microsoft may have a different view, so they make an investment instead."
Microsoft spokesman Tom Pilla responded: "Our investment and acquisition activities are based solely on business considerations and strategies."
Microsoft has announced four acquisitions so far this year, including the Valence deal, according to its Web site. Eleven investments were made by the company during that same time period.
By comparison, the company made seven acquisitions and 13 investments last year.
In 1996 and 1995, Microsoft acquired nine and six companies, respectively, trailing the number of its investments during those years by just one deal. In 1994, however, the Redmond, Washington-based company purchased four companies, compared with only one investment that year.
Also in 1995, Microsoft and Intuit canceled merger plans in a high-profile decision in hopes of heading off a legal fight on antitrust grounds.
Microsoft, which has about $14 billion in cash and short-term investments on hand, as well as stock that can be used like currency, is not short of funds to make acquisitions. Last year it invested $1 billion in Comcast, the nation's fourth-largest cable operator, and laid out $425 million in 1996 to acquire WebTV.
"It's almost always better to make acquisitions rather than investments, but they have to be practical, too," Stanek said. "They will buy when necessary...WebTV was a company that [Microsoft] saw as very strategic and a consumer platform with high-volume [sales]. It was very strategic to them and needed to be under the Microsoft umbrella."
In 1997, Microsoft had an even mix of acquisitions and investments in the first half of the year but then announced a string of eight investments in a row during a four-month period that began on August 6.
On October 20, after much legal wrangling and extensive investigations, the Justice Department asked a federal court to hold Microsoft in contempt for violating the terms of a 1995 court order that barred it from imposing anticompetitive licensing terms on personal computer makers.
During the first four months of this year, Microsoft again had a combination of acquisitions and investments, until late April. Then it made six investments in May and June alone. In mid-May, attorneys general from 20 states and the District of Columbia joined the Justice Department in filing antitrust suits against Microsoft in federal court.
In light of these actions, Stanek said: "I hope we don't go down the road where smart companies are going to have their hands tied behind their backs [when it comes to acquisitions and investments]."