Software Notebook: Microsoft goes on a shopping spree

Microsoft failed in its big bid to buy Yahoo, but it still found plenty of companies to spend its money on during the past year.

The Redmond company paid out a total of $8.8 billion on 21 acquisitions in its recently completed fiscal year, according to a regulatory filing last week. Most of the money went toward Microsoft's $5.9 billion purchase of aQuantive, the Seattle-based digital advertising company.

But even without that unusually large deal, Microsoft's spending on acquisitions would have grown considerably.

Excluding the aQuantive purchase, Microsoft spent about $2.9 billion on a variety of deals – more than twice as much as it spent during the previous year.

The acquisitions demonstrate the areas where Microsoft is trying to fill out its technological capabilities and its product portfolio. Much of the activity during the past year was in search, advertising and other online businesses.

Apart from the aQuantive acquisition, for example, Microsoft paid $1.3 billion for Fast Search & Transfer, a Norwegian company that offers search technology used by large businesses.

"Those are both driven very much by fear of Google," said Matt Rosoff, an industry analyst at the Directions on Microsoft research firm in Kirkland.

The aQuantive deal came after Google announced plans to acquire online advertising giant DoubleClick. Similarly, the Fast acquisition seemed to be motivated by concern that Google would further expand its presence in that part of the market, Rosoff explained.

Google also was a primary motivation behind Microsoft's bid for Yahoo, originally valued at nearly $45 billion.

That would have been the largest acquisition in Microsoft's history, eclipsing the aQuantive deal, Microsoft's biggest to date. Yahoo is No. 2 in the search market, and the deal would have given Microsoft a much bigger share of that market.

Online-related acquisitions completed by Microsoft included YaData, an online advertising firm based in Israel; the San Francisco- based Powerset search company; and Farecast, an airfare forecasting online service based in Seattle.

Other acquisitions by Microsoft during the past year included Danger Inc., the mobile-phone technology company behind T-Mobile's Sidekick device.

In its annual regulatory filing, submitted to the Securities and Exchange Commission, Microsoft said it spent $500 million on the Danger acquisition, confirming earlier media reports.

Microsoft's acquisition volume has gone through a series of ups and downs over the years.

In 2003, Microsoft spent more than $2 billion on three companies alone: video-game company Rare, business applications firm Navision and Web-conferencing company Placeware.

In 2005, the company spent just $207 million on nine deals.

The latest increase in acquisition spending coincides with Microsoft resolving a series of legal actions, primarily related to antitrust inquiries and lawsuits. Although the company has paid out billions in those cases, the settlements and deals reduced the uncertainty over legal liabilities, freeing up the corporate coffers for other uses.

Microsoft's cash balance has shrunk in recent years as a result of dividends and share buybacks, but the company still had more than $23.6 billion in cash and short-term investments as of the end of the fiscal year, June 30. That gives it plenty to spend on acquisitions.

But as with Microsoft's investments on internal research and development, the company is under pressure to show investors that the cash it's putting out in the deals will boost its business in the long term.

"We see acquisitions as a fundamental way of driving growth," said Chris Liddell, Microsoft's chief financial officer, in a presentation to financial analysts last month.

Microsoft Chief Executive Steve Ballmer told an industry conference last year that the company expected to acquire about 20 companies a year over the subsequent five years, with deals ranging in size from $50 million to $1 billion.