Analysis: Wintel acquisitions on the upswing
June 3, 1999
by Eric Brown
(IDG) -- Until last year, the twin towers of PC-based computing--Microsoft and Intel--had largely refrained from the feeding frenzy that gripped other technology companies. While both have spun massive webs of alliances and partnerships, their investments have been modest, and their acquisitions rare.
But starting with Intel's acquisition of Chips & Technologies last year, and continuing with Microsoft's major investments in Comcast and Qwest, the tide began to turn. This year, the Wintel combination has launched an all-out spending spree.
As May drew to a close, Microsoft had announced four acquisitions and 14 key investments. Intel has made two major acquisitions and 11 major investments. And on Tuesday, Intel made one more, disclosing plans to plunk down a cool $780 million in cash for Dialogic.
Is all this spending a sign of maturing corporate entities spreading their wings to converging technologies, or just simultaneous midlife crises? Are Wintel's investments in trendy networking and Internet companies the equivalent of buying a shiny red sports car at the first sign of gray hairs?
While both companies are still immensely profitable and wield unparalleled clout, the warning signs of decline surround them. Having put Java more or less in its place, Microsoft now has to deal with Jini--and Linux and the open source movement could prove an even greater threat. The less than elegant Windows CE is no shoe-in for dominating digital set-top boxes and handheld computers, and it doesn't help to have the U.S. Department Of Justice threatening to break the company up.
Intel made its peace with the Feds but is finding the sub-$1,000 world of the Celeron even tougher going. And the Celeron is faced with even more competition than Windows CE in the newfangled Internet gadget market.
So has the Wintel behemoth hit the panic button? Not likely. The list of recent acquisitions shows few clunkers while revealing numerous smart investments that may help steer the companies through some of the obstacles that face them. Equity investments get them a seat on the board and just enough clout to steer the companies toward Wintel products. Also, acquisitions of small companies such as Jump Networks help to jumpstart product delivery. These companies still have cash left over to make strategic investments in future technologies such as speech recognition and videoconferencing.
The one clear trend in these highly diversified investments is a move toward networking and communications. For Microsoft that means investments in cable companies linked to agreements to use Windows CE in set-tops. For Intel, there's a strong move toward networking chip solutions as well as a surprising leap into Web hosting.
Microsoft: Sure it's just a software company, Bill
What does a $5 billion investment in Ma Bell's telephony and cable empire get you? For starters, a promise to put Windows CE into an additional 2.5- to 5 million digital cable set-tops. (AT&T's TCI had already promised 5 million CE set-tops.) The AT&T deal, in effect, mirrors and builds upon Microsoft's $1 billion stake in Comcast last year. But even $5 billion won't do much to bend Michael Armstrong's ears beyond set-top bundles (including a possible role for WebTV). Still, a good blue chip stock is always nice to have.
To hedge its bets, Microsoft also made twin $30-million investments in two hot DSL companies: Northpoint and Rhythms. The goal: to help set up broadband portals for MSN. This follows up on Redmond's $200 million investment in fiber network provider Qwest late last year. On the other end of the bandwidth spectrum, the $600 million investment in Nextel is also linked to MSN, this time to create a low-bandwidth wireless portal.
Microsoft's Internet investments--WebMD, CareerBuilder, ThingWorld, Jump, and the outright acquisition of CompareNet--should also bolster MSN. Surprisingly, Microsoft also expanded its game division with acquisitions of Access and FASA. Entertainment software is one area where Microsoft can't seem to decide on its role.
Note that in many cases, investments are tied to specific projects--the money aims to give some muscle to a joint technology venture, or to quicken the rewrite of a particular piece of software to a new version of Windows.
Intel: Networking Nirvana
Intel has a venture capital fund of around $3 billion with investments in more than 250 companies, and it's constantly buying and selling shares. Last year's most significant investments stayed close to home in the semiconductor arena. Intel spent $430 million for graphics chip maker Chips & Technologies, bought Digital's semiconductor operations, and spent $500 million for an equity stake in Micron Technology. Its only significant Internet investment was in iVillage, but it had already bought stakes in Internet companies like @Home and CNET.
This year's big deal--the $2.2 billion acquisition of Level One--was the largest in Intel history. It signaled an overall investment strategy of moving into the networking industry to offset the lower margins in the sub-$1,000 PC chip market.
Other networking investments this year include Broadcom, Proxim, Rapid Logic, and its completed $185 million acquisition of Shiva, which was originally announced in October. Intel also continued its strategic investments in multimedia technology companies such as Lernout & Hauspie and PictureTel, nurturing long-term market incentives to buy faster Pentium III processors.
Intel's most interesting investment--its recent $200 million stake in fiber-optic network developer Williams Communications--provides a platform for Intel to enter an entirely new business. Intel has ambitions to set up a network of Internet Data Services facilities with a chief focus on Web hosting. Already, Intel has converted its iCAT e-commerce acquisition into a Mom-and-Pop Web store hosting operation, and now it appears to be going after more substantial small businesses.
Finally, Intel couldn't help but hedge its bets by investing in Linux vendor VA Research, which owns the Linux domain name. Maybe Wintel is not the monolith that many believe it to be.
Microsoft's 1999 investments (through May)
Intel's 1999 investments (through May)
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