Microsoft said its profits dropped to $4.4bn in the first three months of 2008, down from $4.9bn in the same period last year – although revenues remained roughly flat, at $14.5bn. Not exactly a stellar performance, but at the top end of analysts’ expectations – suggesting that the company hasn’t experienced quite as big a drop in demand as some feared. And its Xbox 360 games consoles are still flying off the shelves, helping entertainment revenues increase by almost 70%.
On the other hand, sales of its application software were down on last year; not surprisingly, the current climate is making people hesitate before upgrading their software to buy the latest kit. Microsoft has also been hit with a big (hopefully) one-off cost: the huge $1.4bn fine it received from the European Commission for breaking competition rules. Add this back into the bottom line, and the figures start looking a lot more respectable (although it’s probably not expecting much sympathy on that score from the IT community, given the nature of its offences).
The next problem it must negotiate is its proposed $45bn mega-bid for Yahoo. The feeling is that Microsoft needs the deal if it’s going to have any chance of taking on Google in the lucrative online advertising market (although its online division is growing, it’s still light years behind) – but so far Yahoo is refusing to play ball with Microsoft’s friendly approach. Better-than-expected results for Yahoo this week suggested Microsoft may even have to up its existing offer – but so far it's insisting that it won’t improve the deal that’s already on the table.
And probably a good thing too. A piece of research has reached us from US university UCLA, where academics have been analysing the acquisition records of 2,589 US CEOs over an 11-year period (to try and work out why companies’ returns on acquisitions seemed to be getting worse with every deal). Although they found no evidence of rampant hubris among CEOs (i.e. paying too much due to over-confidence), it identified Microsoft CEO Steve Ballmer as an exception. According to lead academic Professor Richard Roll: ‘Ballmer's first three deals were huge value-destroyers for Microsoft. Hubris? It certainly looks that way. Hopefully, though, his efforts to acquire Yahoo will illustrate the validity of another finding of our study - that hubris-infected CEOs do have the capacity to learn.’
Yahoo shareholders will hope so too...