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Case-13; Microsoft/Intuit
[Acquisition Related]

Group# 23
Group Members
Name MBA ID BBA ID Comment
Md. Imran Hossain 13-573 13-011
Subarna Roy 13-557 13-035
Md. Mahfuz Alam 13-613 13-097
Md. Monsur Rahman 13-497 13-117
Tahmina Tamanna 13-617 13-153

Now Presenting.

Tahmina tamanna
BBA ID# 13- 0153
MBA ID# 13- 617
Case summary
Microsoft, was
considering the possible
acquisition of Intuit.
Possible exchange ratio
could be 70 to 75 in
Microsoft stock for each
share of Intuit.
Possible size of the
transactions would be
$ 1.50 billion.
Now Bill Gates came to
think whether to:
Pay $ 1.50 billion Or,
Focus Microsofts
efforts in other markets
of the future.
Economy Analysis
The USA is the worlds largest economy.

As being developed country, its economic condition is favorable
for investment.

Technology & Infrastructure: (Modern and sufficient)





Porters 5 forces model:


A)Threat of new entrants: Low
1. Huge initial investment
2. Huge rate of innovation

B) Rivalry among existing firms: High
1. Consolidation
2. Imitation possibility

Industry Analysis
C) Threat of substitute products: Low

D) Bargaining power of suppliers: Low

E) Bargaining power of buyers: Low
1. High Switching cost
Industry Analysis
So, overall industry competition is Moderate.
PEST Analysis:
Political : Liberalization in software industry

Economy : Declining growth opportunity

Social : Strong customer relationship

Technological : Modern & Developed

Company analysis
SWOT Analysis of Microsoft

Strength
Largest software developer
Most profitable large public corp.

Weakness
Low market share in personal
finance software
Opportunity
Possible expansion opportunity
Getting repeat customers
Threat
Increasing consolidation
Anti-trust investigation
SWOT Analysis of Intuit

Strength
Quicken- Leading personal fin. soft.
Won challenge from Microsoft.

Weakness
Low market share in other market
segments.
Opportunity
Possible expansion opportunity
Threat
Increasing consolidation
Ratio Analysis
0
1
2
3
4
5
6
Current Ratio
Intuit Microsoft
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Total Debt to equity ratio
Intuit Microsoft
Ratio Analysis
-80%
-60%
-40%
-20%
0%
20%
40%
60%
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
ROA
Intuit Microsoft
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
ROE
Intuit Microsoft

Now Presenting.

Md. Monsur Rahman
BBA ID# 13- 117
MBA ID# 13- 497

Du Pont Analysis
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
1988 1989 1990 1991 1992 1993 1994
Intuit
ROE
Net Profit / Pretax Profit
Pretax Profits/ EBIT
EBIT/ Sales
Sales/ Total Assets
Total Assets/Stockhlders Equity
DU PONT
0
0.5
1
1.5
2
2.5
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Microsoft
ROE
Net Profit / Pretax Profit
Pretax Profits/ EBIT
EBIT/ Sales
Sales/ Total Assets
Total Assets/Stockhlders Equity
DU PONT
Altman Z score model
4.84
5.60
3.66
3.93
4.12
2.91
-1.29
21.26 21.26 21.26 21.26 21.26 21.26 21.26
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
1988 1989 1990 1991 1992 1993 1994
Altman Z score
Intuit Microsoft
Business risk







Particulars Intuit Microsoft
Sales Variability
0.93 0.98
DOL -3.4 1.07
Technological risk Yes Yes
judgment High High
Financial risk
Particulars Intuit Microsoft
DFL 0.98 0.96
judgment Low Low
BCG Matrix
Microsofts
PC Application
software
Intuits
Quicken software
Microsofts
PC operating
systems software
Microsofts
Hardware products
Real Option of Intuit
Creating a new market niche (E-commerce) in 1996:
ASSUMPTIONS
S 200
X 150
Rf 0.08
t 3
2 22%

d1 1.055733651
d2 0.24332981

N(d1) 0.854455041
N(d2) 0.596125044
Continuous comp. Discount factor 1.27124915

c 100.55 mln
Real Option of Microsoft
Creating a new product (Windows 95) in 1995:
ASSUMPTIONS
S
300
X
150
Rf 0.08
t 2
2 20%

d1 1.665171901
d2 1.032716369

N(d1) 0.952060767
N(d2) 0.849131675
Continuous comp. Discount factor 1.173510871

c 177.08 mln

Now Presenting.

Md. Mahfuz Alam
BBA ID# 13- 97
MBA ID# 13- 613


Problem Statement
1. Should Microsoft internally develop or compete
aggressively or acquire Intuit to implement its future vision?

2. What will be the expected synergies from the acquisition?

3. What should be the offer price & premium?

4. How the acquisition will be financed?

5. What will be the implication of anti-trust investigation
on Microsoft?

WACC of Microsoft
Cost of equity
Rf 0.08
Rm-Rf 0.06
Beta= 1.2
Ke=
15.2%
WACC of Microsoft
sources amount weight cost after tax cost WACC
LTD 563 0.1479 0.11 0.066 0.0097
equity 3242 0.8520 0.152 0.152 0.1295
3805 0.1392
Other Risk premium 0.02
Adjusted WACC
15.93%
Microsoft (Base Case)
Assumptions
Sales Growth
24%
Cost of revenue 15%
Research & Development 12%
Operating exp 30%
WACC 0.1593
Tax Rate 40%
Terminal Growth rate
4%
Working capital (% of sales) 0.05
Depreciation % of sales 0.15
Cap exp (% of sales) 0.1
total sales in 93 3753
Firm value 25456.96
Add: Cash 2290
Add: Real option 177.08
Equity Value 27924
No. of Shares 565
Equity Value per share
49
Co-efficient of variability= 18%
Simulation
Microsoft (Best Case)
Assumptions

Sales Growth
40%
Cost of revenue 14%
Research & Development 13%
Operating exp 29%
WACC 0.1593
Tax Rate 40%
Terminal Growth rate
5%
Working capital (% of
sales) 0.05
Depreciation % of sales 0.15
Cap exp (% of sales) 0.1
total sales in 93 3753
Firm value 47864.55
Add: Cash 2290
Add: Real option 177.08
Equity Value 50331
No. of Shares 565
Equity Value per share
89
Co-efficient of variability= 22%
Simulation
Microsoft (Worst Case)
Assumptions

Sales Growth
20%
Cost of revenue 16%
Research & Development 10%
Operating exp 31%
WACC 0.1593
Tax Rate 40%
Terminal Growth rate
3%
Working capital (% of sales) 0.05
Depreciation % of sales 0.15
Cap exp (% of sales) 0.1
total sales in 93 3753
Firm value 20260.84
Add: Cash 2290
Add: Real option 177.08
Equity Value 22727.92
No. of Shares 565
Equity Value per share
40
Co-efficient of variability= 16%
Simulation
WACC of Intuit
Cost of equity
Rf 0.08
Rm-Rf 0.06
Beta= 1.25
Ke=
15.5%
WACC of Intuit
sources amount weight cost after tax cost WACC
Debt 24543 0.33261 0.11 0.0671 0.0223
equity 49244 0.66738 0.155 0.155 0.1034
73787 0.1257
Other Risk premium 0.02
Adjusted WACC
14.58%
Intuit (Base Case)
Assumptions
Sales Growth 45%
Cost of revenue 30%
Research & Development 10%
Operating exp 45%
WACC 0.1458
Tax Rate 40%
Terminal Growth rate 3%
Working capital (% of sales) 0.10
Depreciation % of sales 0.07
Cap exp (% of sales) 0.1
total sales in 93 121.372
Firm value 427.70
Add: Cash 39.54
Add: Real option 100.55
Equity Value 567.79
No. of Shares 11.205
Equity Value per share
50
Co-efficient of variability= 33%
Simulation

Now Presenting.

Subarna Roy
BBA ID# 13- 035
MBA ID# 13- 557

Intuit (Best Case)
Assumptions

Sales Growth 52%
Cost of revenue 29%
Research & Development 15%
Operating exp 45%
WACC 0.1458
Tax Rate 40%
Terminal Growth rate 4%
Working capital (% of sales) 0.10
Depreciation % of sales 0.07
Cap exp (% of sales) 0.1
total sales in 93 121.372
Firm value 591.728
Add: Cash 39.54
Add: Real option 100.55
Equity Value 731.81
No. of Shares 11.205
Equity Value per share
65
Co-efficient of variability= 37%
Simulation
Intuit (Worst Case)
Assumptions

Sales Growth
20%
Cost of revenue 32%
Research & Development 10%
Operating exp 45%
WACC 0.1458
Tax Rate 40%
Terminal Growth rate
2%
Working capital (% of sales) 0.10
Depreciation % of sales 0.07
Cap exp (% of sales) 0.1
total sales in 93 121.372
Firm value 178.299
Add: Cash 39.54
Add: Real option 100.55
Equity Value 318.39
No. of Shares 11.205
Equity Value per share
28
Co-efficient of variability= 24%
Simulation
Intuit + Chipsoft
Assumptions

Sales Growth
65%
Cost of revenue 28%
Research & Development 15%
Operating exp 43%
WACC
0.1539
Tax Rate 40%
Terminal Growth rate
4%
Working capital (% of sales) 0.10
Depreciation % of sales 0.1
Cap exp (% of sales) 0.1
total sales in 93 121.372
Firm vlaue 1099.85
Add: Cash 39.54
Add: Real option 100.55
Equity Value 1239.94
No. of Shares 19.236
Equity Value per share
64
Co-efficient of variability= 34%
Simulation
Offer price of Intuit
Only Intuit Value/share
Base case 50
Best case 65
Worst case 28
Intuit + Chipsoft 64
Average Intrinsic
value/share 52
Only Intuit U$
Intuit's Current market value/share 42
Premium (%) 70%
Premium per share 29.4
Offer price per share 71.4
No. of outstanding shares 11.205
total offer price 800 mln
total premium paid 329.427
Intuit + Chipsoft U$
Intuit's Current market value/share 42
Premium (%) 80%
Premium per share 33.6
Offer price per share 75.6
No. of outstanding shares 19.236
total offer price 1.45 bln
total premium paid 646.3296
Price to Sales Ratio

Industry avg P/S ratio 2.78
Intuit's expected Sales 200
Price 557 mln
Price to Earnings Ratio
Industry avg P/E ratio -26.74
Intuit's exp. Earnings -20
Price 535 mln

Now Presenting.

Md. Imran Hossain
BBA ID# 13- 011
MBA ID# 13- 573
Synergy (If acquire Only Intuit)
1. Revenue enhancement (10 yr) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Intuit sales revenue 175.9894 255.18463 370.02 536.53 777.96 1128 1635.7 2371.7 3439 4986.5
MS sales revenue 4653.72 5770.6128 7155.6 8872.9 11002 13643 16917 20977 26012 32255
Total sales revenue 4829.709 6025.7974 7525.6 9409.4 11780 14771 18553 23349 29451 37241
Revenue enhancement 3% 144.8913 180.77392 225.77 282.28 353.41 443.13 556.59 700.47 883.53 1117.2
Discount rate 20%
Discounted value 120.7427 125.53745 130.65 136.13 142.03 148.4 155.33 162.91 171.23 180.44
Total PV 1473.411637
2. Cost reduction (10 yr) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Intuit COGS 52.79682 76.555389 111.01 160.96 233.39 338.41 490.7 711.51 1031.7 1496
MS COGS 698.058 865.59192 1073.3 1330.9 1650.4 2046.4 2537.6 3146.6 3901.8 4838.2
Total COGS 750.8548 942.14731 1184.3 1491.9 1883.7 2384.9 3028.3 3858.1 4933.5 6334.2
Cost reduction 4% 30.03419 37.685892 47.374 59.676 75.35 95.394 121.13 154.33 197.34 253.37
Discount rate 15%
Discounted value 25.02849 26.170759 27.415 28.779 30.281 31.947 33.806 35.891 38.246 40.92
Total PV of Synergy 1.8 billion
Synergy (If acquire Intuit+Chipsoft)
Total PV of Synergy 2.5 billion
1. Revenue enhancement (10 yr) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Intuit sales revenue 200.2638 330.43527 545.22 899.61 1484.4 2152.3 3120.9 4525.2 6561.6 9514.3
MS sales revenue 4653.72 5770.6128 7155.6 8872.9 11002 13643 16917 20977 26012 32255
Total sales revenue 4853.984 6101.0481 7700.8 9772.5 12487 15795 20038 25503 32574 41769
Revenue enhancement 4% 194.1594 244.04192 308.03 390.9 499.47 631.81 801.53 1020.1 1302.9 1670.8
Discount rate 20%
Discounted value 161.7995 169.47356 178.26 188.51 200.73 211.59 223.69 237.24 252.52 269.84
Total PV 2093.655526
2. Cost reduction (10 yr) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Intuit COGS 56.07386 92.521876 152.66 251.89 415.62 602.65 873.84 1267.1 1837.3 2664
MS COGS 698.058 865.59192 1073.3 1330.9 1650.4 2046.4 2537.6 3146.6 3901.8 4838.2
Total COGS 754.1319 958.1138 1226 1582.8 2066 2649.1 3411.4 4413.7 5739 7502.2
Cost reduction 5% 37.70659 47.90569 61.3 79.141 103.3 132.45 170.57 220.68 286.95 375.11
Discount rate 15%
Discounted value 31.42216 33.26784 35.474 38.166 41.514 44.359 47.603 51.324 55.613 60.583
Total PV 439.326315
NPV of merger
If Microsoft acquires (only Intuit) U$
Synergy 1791.896
Premium paid 329.427
transaction cost (25% of the offer price) 200.0093
NPV 1.2 bln
If Microsoft acquires (Intuit+Chipsoft) U$
Synergy 2532.982
Premium paid 646.3296
transaction cost (25% of the offer price) 363.5604
NPV 1.5 bln
Cash or Stock offer
Cash Offer
Stock offer
(Exchange ratio)
Only Intuit 800 mln 1.5:1
Intuit+Chipsoft 1.45 bln 1.55:1
Is it right time to acquire?
Yeah, this is the right time. Because:-

High consolidation in the PC industry

To grab the customer base of 7 million users of personal finance
software of Intuit.

To develop the capabilities needed to enter Home entertainment & E-
commerce effectively & efficiently.

If delay, the other rivals may attempt to acquire intuit & that will reduce
the market share of Microsoft.

Implications of Anti-trust Investigations
The anti-trust investigation will not have a large impact on Microsoft.

Because:

Microsoft has made an agreement with the-
Commission of the European Community and
U.S. Department of Justice.

These two agreements promised to end a 4.5 year investigation of
Microsofts business practices.

These will mitigate the possible restrictions to be imposed on
Microsoft by the regulatory authority.
What if Microsoft internally develops capabilities?
On Demand Home entertainment & E-commerce services
Huge costly & Time consuming
Assumptions

Sales Growth 35%
Cost of revenue 16%
Research & Development 15%
Operating exp 31%
WACC 0.1593
Tax Rate 40%
Terminal Growth rate 4%
Working capital (% of sales) 0.05
Depreciation % of sales 0.11
Cap exp (% of sales) 15%
total sales in 93 3753
Firm vlaue 25973
Add: Cash 2290
Add: Real option 177
Equity Value 28440
No. of Shares 565
Equity Value per share
50
What if Microsoft gear up to compete more aggressively?
Assumptions
Sales Growth 30%
Cost of revenue 16%
Research & Development 14%
Operating exp 31%
WACC 0.1593
Tax Rate 40%
Terminal Growth rate 4%
Working capital (% of sales) 0.05
Depreciation % of sales 0.115
Cap exp (% of sales) 0.12
total sales in 93 3753
Firm vlaue 25532.083
Add: Cash 2290
Add: Real option 177.08
Equity Value 27999.163
No. of Shares 565
Equity Value per share 49.55
Recommendations
Microsoft should not go for internal development rather it should acquire
Intuit after Intuit acquires Chipsoft.

The equity value per share of Microsoft:



Total synergy will be 2.5 bln, Transaction cost 25% of offer price &
total NPV 1.5 bln

It should provide the cash offer of $1.45 bln for acquiring 19.236 million shares
@ $75.6 per share with a premium of $33 (80%) per share.

This offer price would be 1.8 times of Intuits current market value $42 per share.

Existing Compete
Aggressively
Internally
develops
Acquires Intuit
$49 $49.55 $50
$53
Financing of the acquisition
Total financing
needed USD
Offer price 1454.242
Transaction costs 363.5604
Total 1.8 bln
Existing C/B 2290 mln
Idle cash % in 1993 20%
Idle cash 458 mln
Financing sources
Existing Cash 25% 458 mln
Secondary offering 75% 1360 mln issue 30 mln shares @45
New Capital Structure
Capital Structure New Existing
Total Debt to Equity ratio 12% 17%
Total Debt to Asset ratio 14% 15%
20
19
21 21
22
22
24
26
29
32
0
10
20
30
40
1994 1995 1996 1997 1998
Expected Z score of Microsoft
Without acq. After acq.


Question & Answers..