Microsoft could scoop up one of Big Five, Gartner says

A post antitrust Microsoft could come replete with some major acquisitions, an analyst speaking at Gartner Group's annual Windows conference in Los Angeles suggested this week.

          A post antitrust Microsoft could come replete with some major acquisitions, an analyst speaking at Gartner Group's annual Windows conference in Los Angeles suggested this week.

          Amid discussions over the future of Microsoft's software and services strategy, Gartner analyst Tom Bittman predicted that Microsoft would follow the resolution of its lengthy antitrust battle with a shopping spree.

          "In the first year post-antitrust, we expect Microsoft to spend $US4 billion on acquisitions," Bittman said. "There are lots of vendors that may be struggling during this bubble burst that Microsoft may take a look at."

          Without putting too much weight behind his guess, Bittman said a potential acquisition target for Microsoft could be one of the Big Five management and consulting firms: Deloitte & Touche, Ernst & Young, KPMG Consulting, PricewaterhouseCoopers and Accenture (formerly Andersen Consulting).

          "It's a role they need to be in if they are going to grow in the enterprise," he said.

          Microsoft announced last week an internal effort to grow its consulting services division. The company combined its support services and consulting business to take a more aggressive role in grabbing the lead role in major contract jobs. While consulting makes up only about 3% of its total revenue, the unit is Microsoft's fastest-growing business, according to Gartner.

          Bob McDowell, vice president of worldwide services at Microsoft, who will head the new division, said last week that the shift to consulting has become necessary as Microsoft makes its move into the high-end server market. He also noted that for Microsoft to implement its broad .Net vision successfully, customers will require a range of consulting services as they work through sometimes complex projects.

          The company sees the need for a more complete set of consulting services growing so dramatically, it plans to increase its head count in the new division 20% to 30% each year, from the current 13,000 employees.

          While Gartner's prediction was followed by a number of disclaimers, such as the unknown outcome of Microsoft's antitrust appeal and any impact that ruling could bring, other industry watchers say they wouldn't rule out an acquisition in the consulting area.

          "I think that you could definitely see them go in that direction," said Brendan Barnicle, a financial analyst with Pacific Crest Securities. "They're obviously sitting on a pile of cash."

          Microsoft has about $US26.9 billion in cash and $US18.3 billion in investments that will likely be put to use when its antitrust battle with the Department of Justice comes to a close, according to figures from Gartner. That enables Microsoft to buy into partnerships, such as its recent $US25 million loan to business-to-business software maker Commerce One, and pick up key components to build on .Net, its initiative for delivering applications and services to various types of computer over the web.

          Microsoft already has reacted to the momentum gathering behind the "software as a service" concept with its $US1.1 billion purchase of Great Plains Software. The company recently started announcing services based on Great Plains' products at its bCentral Web services site for small and medium-sized businesses. A dominant position in the consulting business would allow Microsoft to play a lead role in helping customers to implement its new services.

          "That would be a very valid use of capital for them." Barnicle said. "That's the piece Microsoft is missing when going up against IBM and others."

          An acquisition in the consulting business would not be the first for a major computer hardware or software company. In September 2000, Hewlett-Packard offered to buy the global consulting division of PricewaterhouseCoopers. Negotiations over an acquisition -- valued at between $US17 billion and $US18 billion in stock -- ended two months later with no deal. Since then, HP has tackled the need for a service division by expanding internally, and has commented on other potential targets such as Scient. Microsoft has also spent its share in the space, spending $US385 million on a partnership with Accenture, then called Andersen Consulting, to form Avanade.

          Making such a big move as acquiring a top five consulting company would be out of step with Microsoft's traditional growth strategy, some analysts argued. Typically the company has grown organically, making only small buys to move into key market segments. "They don't usually do big blockbuster acquisitions," Barnicle said.

          Taking the reins of a major consulting firm could also be difficult because it would put Microsoft in the position of having to integrate its products with a variety of competing applications used by large customers. Also, analysts note, profit margins are much lower in the management and consulting industry than in software.

          "I'm not sure they would want all those things," Barnicle said. "If they can grow it internally, that may be enough."

          Bittman said that Gartner has already started compiling a list of possible acquisition targets, but would not comment on any specifics. "I don't want to be in the business of killing someone's stock," he said.

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