file attached

Company: Microsoft Corporation
1. Background
1.1 Industry
The Information Technology industry is one of the fastest growing in terms of the usage and the dependency the industry has created on various other industries (Gu, Yang and Huo 2021). This dependency has been created because of the increasing demand for technology for all kinds of needs from manufacturing, demand forecasting, and customer interaction to final sales and after-sales services.
The Information Technology industry is picking at a faster pace since 2020 when COVID-19 struck the world and every door closed, and people started consuming and working digitally. This pace took the companies to the sky and the Global Information Technology (IT) market size grew to $8 trillion at the end of 2021, and now with the increase in the digital usage, more dependency, and advanced technologies the market size is expected to grow to $9 trillion by the end of 2022.
Growth in the Information Technology sector has been fasted paced because of the new technology trend which the companies with the help of Research and Development (R&D). Some of the trends we are seeing are:
· Cloud Computing: The growth in cloud computing is the current trend which is making more companies move to the cloud with the innovation and transformation
· Digital Connect: With COVID-19 and lock down all the companies had to start working remotely and this started the trend of Hybrid working which is creating more and more tech solutions to help the culture, work, and all the other things which used to be there in the companies a part of remote working
· Sustainability: One topic which is so much related to Information Sustainability because if one thing can bring sustainability it is a technology, and this is because technology through innovation and development can help in optimizing the process which will help in bringing sustainability
Many such trends are growing in the Information Technology industry and that is the sole reason the industry is growing at a CAGR (Compounded Annual Growth Rate) of 12-15%, the fastest across industries (Zhang and Li 2021).
1.2 Company
Microsoft Corporation was founded on April 4, 1975, by the two co-founders Bill Gates and Paul Allen. The company has been one of the fastest growing information technology companies in the world with a CAGR (Compounded Annual Growth Rate) of more than 15% over the past 47 years.
The company’s growth strategy is very aggressive where the company always try to look at opportunities which can help the company to grow and be the market leader in information technology across the industry. The company believes in innovation and that is the reason the company invest hugely in the Research and Development (R&D) to bring innovations because the firm believes that to grow in the information technology industry one has to keep innovating and bringing new products to the market.
The financial strategy of the company is on the conservative side where the company believe in keeping a lot of cash and short-term investments, but this is changing in the recent years where the company is looking to invest the cash to acquire many companies to grow at a faster pace than the past. The conservative financial strategy gives the company a lot of advantage and that is the reason the firm believe to keep continuing with this strategy, as being a conservative mean that the firm always has the cash to make an acquisition which the firm keep undertaking, save revenues for the future which can be used by the company to show the revenues in the future during the hard times. The company has done around 12 major acquisitions in the past fourteen years of over $1 billion which are:
· aQuantive – 2007
· Fast Search & Transfer – 2008
· Skype – 2011
· Yammer – 2012
· Nokia’s mobile and devices division – 2013
· Mojang – 2014
· LinkedIn – 2016
· GitHub – 2018
· Affirmed Networks – 2020
· ZeniMax Media – 2020
· Nuance Communications – 2021
· Activision Blizzard – 2022
Mergers and Acquisition
Mergers and Acquisitions play a key role in the growth of companies as they give the companies the technology and the audience which can help the company grow at a fast pace. Mergers and Acquisitions become important because building something from scratch takes time while with mergers and acquisitions the firm can acquire the technology and the already made audience (Kar, Bhasin and Soni 2021).
The major mergers and acquisitions done by Microsoft Corporation in the past 5 years are:
· Activision Blizzard - $68.7 billion (2022)
Microsoft acquired Activision Blizzard in January 2022 at a valuation of $68.7 billion making it the company’s biggest ever acquisition of all time. The acquisition was done as part of the strategy which Microsoft has set of getting into the gaming business aggressively. This is to accelerate the growth that Microsoft’s gaming business across its platforms is already seeing. The closing of the deal will make Microsoft the world’s third largest gaming company in terms of revenue, just behind Tencent and Sony.
Activision has been growing rapidly with all the game launches that the company is doing year on year to capture the market. The company’s revenue stands at $8.80 billion for the year 2022, and a revenue of $1.77 billion for the first quarter of 2022 making it one of the largest gaming companies in the world in terms of revenue.
The company’s sales growth is because of the increasing penetration which we see across the gaming industry as a result of more competition. This growth in sales is also because of the COVID-19 pandemic which made the people stuck at home and they started playing more and more games resulting in higher revenues for the gaming companies.
The deal is also a defining one for both companies because of the synergies that are expected after the acquisition. Microsoft is among the largest cloud computing companies with a presence in AI, machine learning, and analytics which will give Activision a more accessible platform to make cloud and blockchain-related games which is getting popular day by day because of the earning potential of the player see playing these games.
Assuming that the gaming industry gets saturated again in the coming years when the world gets back to the pre-pandemic levels, then the risk of Microsoft Acquiring will be very huge. At a probability of 50%, the risk of loss will be
Risk = $68.7 billion * 50%
= $34.35 billion
· Nuance Communications - $19.7 billion (2021)
Nuance Communication was acquired by Microsoft in April 2021 to boost the Cloud and AI division at Microsoft. The deal was valued at $19.7 billion, and Microsoft paid $56 per share to Nuance’s shareholders. The acquisition was targeted to get into healthcare which is booming because of many reasons and Microsoft is finding an opportunity to cater to this demand by utilizing the AI and cloud computing power it has. This acquisition was done to bring the synergies of the already established AI and cloud for healthcare by Nuance and the technology foray which Microsoft has to design a robust and more flexible solution for the healthcare around the globe.
The financial performance of the company is not very good with the company earning a revenue of $1.33 billion, which is less than the 2019 revenue, and this revenue fall is also leading to a declining profit for the company. But because of this synopsis and strategy, Microsoft acquired Nuance because the company was valued at very less than its peak valuation in 2018 when the company’s revenue peaked at $2.04 billion.
Assuming a probability of losing the company will lose out on the investment at a rate of 50% which will be
Risk = $9.85 billion
· ZeniMax Media - $8.1 billion (2020)
ZeniMax Media was acquired by Microsoft with the strategy of getting more strongly into the gaming industry because the world was seeing a gaming boom and to make the best out of it the company needed some acquisition to get a more stronghold in the industry, and for this, the firm acquired the gaming companies, and one of the biggest one at the time of 2002 was the acquisition of ZeniMax Media by Microsoft.
ZeniMax Media is the largest privately held game developer company in the world, and therefore it was giving the width the already existing console and PC games of Microsoft which the firm has. The revenue growth at the company is also good at around $450 million. And being profitable makes the financial performance of the company better, as gaming companies need to look for profit because most games which are played are freely available.
The risk of loss based on the assumption is very high as the volatility in the gaming industry is huge.
Risk = $4 billion
· GitHub - $7.5 billion (2018)
Microsoft is one of the largest technology companies in the world needed a code-repository company to cater to the demand of the coding boom across the globe and to do this the firm acquired GitHub in an all-stock deal valued at $7.5 billion in the year 2018.
The deal was aimed with the strategy of giving Microsoft the developer tools and services which will be needed to create the enterprise audience for this segment and also to create the largest coding repository.
The financial performance of GitHub ever since Microsoft has acquired is increasing with increasing revenues and increasing profits, including more tie-ups with the companies to give them access to the coding repository.
In the case of a code repository, the risk of loss is very minimal because the coding industry is there to stay and no disruption can take away the advantage of this industry. Assuming a probability of 10%.
Risk = $7.5 billion
· LinkedIn - $26.2 billion (2016)
Microsoft acquired LinkedIn (i.e., a professional networking company) at a price of $196 per share valuing the acquisition at $26.2 billion and also the second largest acquisition done by Microsoft.
The purpose of the acquisition as described by Microsoft is to accelerate the growth of LinkedIn and Microsoft 365, Dynamics to give the power to every person and organization on the planet a professional communication and networking platform. The acquisition was from the strategy to make the marketing of Microsoft products stronger and with this acquisition, the company got a growth strategy of bundling the services and also entering into the advertisement segment which can earn a lot of revenue for companies.
LinkedIn has been a major contributor to the top line (i.e., Revenues) of Microsoft, in 2018 the company contributed a total of $5.3 billion in revenues which increased to $10 billion at the end of 2021. SO, this means that the financial performance of the company is great and has been adding value to the parent company.
The growth rate in the sales of LinkedIn is giving a great boost to Microsoft as the top line of the company is increasing at a faster pace than it was predicted, and the various revenue model such as subscription, advertising and promotions helping the subsidiary to boost its revenue and leverage the parent’s technology power to gain more market share. Currently, there is no better platform than LinkedIn in the market for professional networking.
Risk = $5 billion
Risk Analysis
Risk Assessment
Risk Analysis is an important step to do for every company because this helps the company to know how much risk the company currently has and what amount of risk the company can see in the future (Simsek and Olcay 2022). Risk Impact Assessment is one factor which can impact the corporate strategy of any company because the risk assessment gives you a view of how much risk the company can take and what is the risk will arise if the company go ahead with the strategy and if it goes over the benchmark set by the company then the particular strategy or action will not be undertaken.
Successful companies manage risk effectively and this has been the history, and this will be the future too. Strategic risk is the risk that impacts the company’s corporate strategy set out because the strategic risk arises as a result of the business strategy and strategic objectives defined by the company. Therefore, to effectively manage the corporate strategy risk management has become an integral part of any company, therefore the top management and board of directors are given the task of risk management so that the impact of the risk is less on the corporate strategy.
For creating the most out of any corporate strategy the firm needs to invest and currently, the trend is to invest in human capital because they are the one source which can create a risk assessment and at the same time create a corporate strategy for the company is both effective and efficient.
Financial Performance
The financial performance of a company is measured by the revenue growth it has, the profit the company generates over the years, and the liquidity it has (Nwaokorie 2021), and in all these aspects no company is better than Microsoft. This is said because the firm is earning revenue which is growing at a CAGR of 12-15% year on year. The profitability of the company is growing at the same rate with improving net profit margin (one of the core metrics to measure the financial performance of any company). Talking about cash, the firm generates so much cash that it can buy out any company today, this is because of the conservative approach the company takes which means that it stores the cash as cash or as a short-term investment to fund the acquisitions. As stated above almost all the major acquisitions which the company did in the past 5-10 years were all cash deals. The firm also likes full control and therefore the firm buys out 100% of the stake in any company it looks to acquire and grow with.
Advice
The company is advised to measure the risk by taking a top to a bottom approach which means that the firm should start with the industry and then go down to the company level to measure the risk in terms of finance, operations, and all the other areas which can have an impact on the financial and strategic performance of the company.
TO manage the risk the firm should take a step-by-step approach as stated below:
1. Identify the risk
2. Analyse the risk to see what impact it can have
3. Evaluation of the risk and conducting a risk assessment
4. Treatment of the risk which can have the best impact on the corporate strategy of the company
5. Monitoring and reviewing the risk
Because risk is something which cannot be ignored by any company, nor it can be eliminated therefore a continuous approach of identification and treatment should be taken to manage the risk which arises and to measure the risk both qualitative and quantitative tools must be used to get the best outcome.
Analysis of Financial Perspective
Capital Structure
Microsoft is more reliant on equity capital than on debt capital because the profit which the company is earning is also added to the equity and therefore the equity component of the company is rising. Also, because debt also impacts the income statement of the company therefore the firm is reducing the debt capital from its books.
The current capital structure of the company as at end of 2021 looks like this:
· Debt - $77.98 Billion
· Equity - $141.99 Billion
This gives the company a capital structure of Debt – 35.45% and Equity – of...