Meet Chris Liddell, CFO of Microsoft Corp.
About one week ago, I had the outrageous opportunity to meet Chris Liddell, Chief Financial Officer of Microsoft Corporation. Chris happened to be in Paris for a day so it was absolutely compulsory to do something about it. As a result, Julien brought a bunch of software-friendly French venture capitalists in a room alongside with Chris for an informal chat mainly about Microsoft’s corporate development strategy and the venture landscape in France and Europe. Prior to the meeting, Chris said everything that would be said could be blogged. So I’m absolutely delighted to share this very unique moment with you, dear partners, competitors, and mere readers.
Chris started the meeting by congratulating the French rugby team for beating New Zealand at the World Cup – too bad France lost vs. England in between. Chris is indeed originally from New Zealand although he obviously new leaves in Redmond, WA. A civil engineer and graduate in philosophy, Chris is a seasoned corporate financier who has come a long way from banking and manufacturing to software at Microsoft. Chris opened the meeting by saying he aims to take finance at Microsoft to a more strategic level: Finance has always been strong in budgeting and reporting, but Chris wants to push it to the next level, to bring it up to think more strategically. Chris also recalled that Microsoft spends USD 7 billion every year in R&D. The big issue is to spend it wisely. Although none of the VC was a Microsoft shareholder, for compliance reasons, Chris made clear that any investor in Microsoft should accept the fact that MSFT is a long term investment, not a quarter company. Without R&D, there is no growth and no future. Chris even plans on expanding R&D investments to ensure growth. “Bill Gates and Steve Ballmer are the two longest thinkers I’ve ever known“, Chris even said. Which is, looking back at Chris’s background, no soft claim.
A number of topics were tackled during the meeting, here they are:
Microsoft has become more acquisitive recently, buying companies priced between USD 6 million to USD 6 billion. Microsoft acquired around 2 companies every month (20 to 25 companies every year). In terms of breakdown, Microsoft acquires a lot of 10 to 15 million dollar technology startups, 2 or 3 companies per year in the 20 million to 1 billion dollar range, and one above in 2007 (USD 6bn, Acquantive). Microsoft’s goal is to acquire companies that will give the company extra growth, which is THE key metric Chris seems to be focused on. Asked about a specific industry Microsoft would be keen on proceeding with new acquisitions in a near future, Chris mentioned online services where he feels Microsoft being between #2 and #5 leaves enough room to expand the business footprint. Chris said he couldn’t be more explicit. I think that’s pretty understandable because valuations in the would-be mentioned business would then skyrocket in a sort of irrational way.
Chris also mentioned entertainment as a hot M&A market, making it clear though that it wouldn’t be related to the XBOX, which according to him has a good market position but isn’t profitable yet. Why? Although the XBOX has reached critical mass (not in Zune yet), Microsoft has to learn how to lower manufacturing costs, which isn’t exactly its core business. Chris went on talking about Microsoft’s culture that advocates to build the company. However, Microsoft growing bigger and bigger (between 12% and 17% yearly in the last 5 years) finds it harder and harder to go it alone. M&A is a sort of substitution. In terms of capital structure, Chris remembers finding USD 60 billion at bank when he joined the company. Chris gave a lot of money back to the shareholders and now there’s about USD 30 billion at bank. So Microsoft has what it takes to acquire a large number of companies with no impact on cash. Chris added that Microsoft isn’t involved with any fund, and isn’t planning on building its in-house investment arm. Microsoft isn’t willing to invest in companies and thinks it is much better to leave investments to professional investors.
Chris then asked Eric Harlé and Nicolas Landrin from iSource, a VC-sponsored by INRIA, CDC and AXA that had sold mobile advertising company ScreenTonic to Microsoft, about how the whole process went. Eric and Nicolas answered saying it had been a very smooth process since the founders of ScreenTonic had from scratch structured their company so that it could be easily integrated into a larger structure. Julien Codorniou, French EBT lead, who had detected a potential deal initially, was then asked how it was all initiated. Basically, ScreenTonic came to Microsoft to partner, but Microsoft realized ScreenTonic would perfectly fit a gap in Microsoft’s technology road map. So it was decided to check with Microsoft Corporate Development whether it would be possible to proceed with an acquisition. The answer was ‘yes’ but the entire process between the first meeting to the press release took nine months.
Chris then explained that this the kind of decentralized process he wanted Microsoft to lean towards. What happens usually is very Product Group-centric and doesn’t involve subsidiaries. In order to define the acquisition strategy, Corp. Dev. goes once a quarter from product group to product group, product groups which are asked to identify areas and potential target companies. Chriss Liddell added he was working hard with Dan’l Lewin to bring the VC community in the loop to talk about M&A. A few VCs then added that they appreciated receiving 5-to-10-slides Acquisition Strategy Briefings that say “we’re looking for this” by email from the competition – a practice Microsoft hasn’t adopted and is apparently not planning on doing so. Dan’l and Chris’s goal is to ensure there is a systematic dialog between the Emerging Business Team, Corporate Development, and venture capitalists from all over the world. Asked by Chris about things they wanted Microsoft to do, the venture capitalists said they would love to have one day one-to-few event every year with a Strategy Exec. from Microsoft. All of them then appraised the value proposition of the IDEAS program (the French Startup Accelerator program) and the reactivity of Julien Codorniou when it comes to opening doors and making things happen at Microsoft France. VCs indeed hope Microsoft will make it easier for French startups to get connected with Microsoft Corp. Product Groups, something pretty complex to achieve as of today.
Jean-Stéphane Bonneton from Iris Capital then inquired about the acquired companies integration methodology deployed by Microsoft. Chris answered by saying that Microsoft buys companies to expand, not consolidate. Microsoft has changed a lot in this area indeed. Although it used to be Redmond-centric and make people shift to the Seattle area, Microsoft now leaves at least half of the teams in place. In the case of ScreenTonic, Eric Harlé added, it made sense to leave everyone but two developers in place since although the technology can be applied globally, mobile advertising is a very local business. Chris and iSource perfectly agreed on the benefits of a distributed model, which seems to work. Chris emphasized Microsoft’s interest in buying more companies internationally.
Chris being curious about the French software entrepreneurship landscape, Philippe Collombel from Partech International explained how the the situation of the venture business had improved thanks to the emergence of a wave of serial entrepreneurs in France. France begins to have serial entrepreneurs, and all venture capitalists believe this is a blessing to their returns. As a perfect example, Collombel explicitely mentioned Stéphane Bohbot, who successfully founded and sold DigiPlug, and now heads listed company Modelabs. Since Stéphane Bohbot is in his thirties, there are probably 5 more companies to come from Stéphane and Philippe made clear he would want to be in when that time comes.
Michel Dahan, from Banexi Ventures, then added that the French career model has changed a lot: entrepreneurs are a lot more valued than a decade ago. In France, as well as in Germany it seems although entrepreneurship is still a bit undervalued there, top engineers and students from the best business schools are still excessively large company focused, but it is no shame anymore to work for a high tech startup. “Many bright graduates spend two to three years in large corporations before joining or founding a startup – that didn’t happen a decade ago”, Dominique Agrech, partner at XAnge, the VC arm of La Poste, added.
What France lacks, it seems, isn’t a pool of talented entrepreneurs and promising startups. France is a seller market, not a buyer market, because large French corporations have no M&A strategy. According to all venture capitalists in the room, very few large French companies – but Dassault Systèmes, many added – have a clear acquisition strategy. Alcatel-Lucent, Thalès, France Telecom – Orange or ILOG are said to be contaminated by ‘NIH syndrom’ and don’t go and fetch innovation outside the box; on top of that, they seem not to be able to structure an M&A process or be able to come up with a market price – the VCs say. So, what the VCs do is pretend their portfolio companies are to go public in order to generate interest from American corporations (80% of buyers are from the US). There are few IPOs in France mainly because IPO requirements aren’t unified yet at the European scale. As far as deal intermediation is concerned, French VCs are happy with small tech M&A boutiques and expensive corporate lawyers, and claim there are very decent fundraisers. Unfortunately, software deals are too small for large banks, which are not good in this space on top of not being interested by the size of such deals. VCs all said this was a pity since large banks would have a larger road show surface and deeper execution history. Asked by Chris about the competition they faced from US funds at exit times, the venture capitalists answered it could happen but on pre-IPO series (D or E) only.
Although it’s been a fabulous moment between oversmart venture capitalists and easy going but razor-sharp Chris, I was a bit hungry at the end of the meeting. I basically had to bite my tongue during the entire meeting to prevent my own self from asking a thousand questions, starting with:
- The venture capitalists answering a question from Chris on France’s software specialties; they rightly highlighted 3D, appliances and mobility. But hey, what about datamining? eCommerce infrastructure? video? augmented reality? encryption? rule engines? retail management software? video games? neural networks and, broadly speaking, artificial intelligence? robotics? I could name at least 5 rock star companies in all these domains, on top of 3D, appliances and mobility.
- The Google stock outperforming Microsoft in terms of value creation, therefore helping Google acquire companies for stock rather than cash.
- Whether a company with intellectual property is worth more than a company with no patents and trademarks
- How Microsoft comes up with a valuation when engaging a company in the M&A pipe.
- What’s the impact of piracy on Microsoft’s revenues and stock?
- Microsoft’s expensive capital structure (no long term debt so the weighted average of capital roughly equals the cost of capital, which is higher than the cost of debt).
- Chris said Microsoft doesn’t invest in companies. But what about the Facebook rumor then?
- Many VCs here don’t believe in enterprise software anymore. I would have loved to hear Chris stating that Microsoft’s B-to-B business drives current growth for both the corporation and its partner ecosystem.
- Microsoft doesn’t distribute stock options anymore but plain vanilla stock – a stock that has been flat around USD 30 for a few years now. So, with startups becoming more and more attractive (quite understandably), what’s the company policy when it comes to attracting and retaining the best talents?
Well, Chris, if you ever come accross these lines…Many thanks again for your time and these very interesting insights on Microsoft’s expansion strategy.
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- Lessons from Microsoft's acquisition of ScreenTonic
- The Euro vs. Dollar double gambetto for high tech corporations
- 7 PR best practices for software startups, made in Ballou PR
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Business strategy, Consulting, ERP, Economics, Education, Entertainment, Entrepreneurship, Europe, Facebook, Finance, Future, Google, Internet, MNC, Microsoft, Organization, SME, Software, Technology, USA, Venture Capital, innovation, operations, web2.0
Ugh, and I thought I write long posts (btw. I had to spend an hour to cut 500 words from my last one)!
Some very good questions, and I hope Chris drops in to answer them.
With Microsoft’s experience in building platforms, its excess cash, and the legal environment favouring non-monopolists, I imagine the best route forward for Microsoft is towards becoming a venture capitalist for start-ups using MSFT-technology, and being very careful in the acquisition-choices it makes.
I would love to see them enter the areas you mention, even more than they already have, but I also think that the home-entertainment market is a huge focus point, simply to improve MSFT’s brand in the eyes of consumers. The Xbox and gaming in general is probably the best Microsoft has going for it, in terms of consumer-PR, which, in the long-term (generations), will affect the adoption-rate for other types of Microsoft-products, both at home and in business.
B2B, which is what you’re talking about, is also a huge market, but exactly the one which Microsoft must probably thread more carefully, for anti-trust reasons. This is just my interpretation of course and I’m happy to hear how/whether I’m wrong.
Btw. I know very little about the advertising business and the thinking behind that. I’d love to hear/read more about Microsoft’s strategy in this direction.
Lucky You!
Meet Chris Liddell, CFO of Microsoft Corp.
New post at techiteasy.org
Jeremy, you’re still the man.
@vincent> On Microsoft becoming a venture capitalist for startups. I think it would be a huge mistake: partnerships are at the heart of Microsoft’s business model, so why would you want to send a signal to the market that Microsoft invests in everything? By the way, a harsh competition is at dawn; the name of the competitors are Apple, Google, Oracle, Salesforce, and two or three more players that are still early stage projects somewhere in a garage in San Francisco or a basement in Beijing. That battle will be cash consuming as hell.
On consumer electronics: what do you think of all old Zunes being automatically upgraded for free when Microsoft launched its last Zune?
On B2B: you’re right; but I wanted to emphasize the fact that VCs are probably wrong when they claim enterprise software is dead.
Advertising: think Google compete.
@Kari: why ’still’?
Well the way I see the role of a corporate venture capitalist, is to invest in companies that are (or can be) either strategically aligned with the corporation’s objectives, or in companies that are or can be disruptive for competitors. I don’t think that Microsoft should or will ever consciously want to broadcast the image that it will invest in anything, nor do I think that this is unrelated to competing with companies like Google or Salesforce.
What do I think of the free upgrade on Zune? For one, that Microsoft is in trouble. The way the Zune works, with its “squirts,” is that it needs a lot of people to have them. Upgrading old machines for free is a sign that they are not expecting to sell many new machines quickly.
And it is a sign of a bad business-model. When Microsoft began the Xbox-model, part of it was based on the philosophy of Neal Stephenson’s Metaverse, where everything is connected. That works very well for the Xbox, together with a PC-platform. It does not work so well for mobile music-players, especially with big media breathing on the back of file-sharing business models. In all seriousness, I think Micrsoft opened a can of worms with the Zune,
As it stands it’s a second-class product, not aligned with Microsofts strength (which is not in manufacturing) and it will take some years before it will be ready to compete or very possible be abandoned. If we are speaking of growing mind-share, the Zune is a terrible example.
Okay, we fully disagree on the Zune thing Vince.
As a Microsoft employee, I have always acknowledged some products were mediocre (some are great, but some are mediocre).
That’s why, with Microsoft announcing all first generation Zune would be updated for free, I couldn’t feel prouder to realize how much the company had increased its proximity with consumers. A typical Microsoft update 5 years ago would have cost something like a hundred dollars. Today, it’s free for consumers to trust the product, the brand, and purchase the current Zune without having to worry about the next version – that will be made downloadable for free to all Zune fans.
My 2 cents: Zune will have outmarketed iPod in a decade. http://techiteasy.org/2007/02/24/mahatma-gandi-on-microsofts-zune/
Once again we don’t fully disagree on this Zune thing, Jeremy. As you wrote in your other post, Microsoft has produced some great products in the past, and I think they did tremendous work with their Xbox-product, leveraging their strength in software and partnerships towards making one of the best media-devices out there. I fully expect there to be an intense battle ahead to win the market in portable media-players also.
Anyway, this was not the original intent of this post, so I’ll leave it here.
Right Vince, this isn’t the original purpose of this post. But we should definitely build a case study out of this Zune thing when we see each other. Keep in mind you’re most welcome at my place in Paris anytime.
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