Amazon & Microsoft
Is Amazon in a position to acquire Microsoft Azure?
Amazon’s acquisition of Microsoft Azure would allow them to capitalise on a rapidly growing technology, surpassing all previous growth metrics. With businesses making efforts to create flexible work options, cloud communication platforms have grown in popularity. John Dinsdale, Chief Analyst at Synergy Research Group stated, “this is also a market which has proven to be immune to COVID-19. If anything, the pandemic has helped highlight some of the main benefits of public cloud”. According to Verified Market Research, the Global Cloud Communication Platform Market was valued at USD 2.93 billion in 2019. By 2027, the market is forecasted to reach a whopping USD 17.62 billion, growing at a CAGR by 27.1% from 2020 to 2027. The US makes the largest contribution to the market. The region with the largest market share in the global communication platform market is the North American region, registering a CAGR of 24%. The market is largely dominated by 3 core players: Amazon Web Services (AWS) 33%, Microsoft Azure 18%, and Google Cloud 9%.
Having studied potential acquisition targets for Amazon to gain greater market share in the cloud market, Microsoft Azure has been identified as the most attractive target given its current revenue and popularity in the market. The next steps are to begin the Strategic Due Diligence process before submitting a formal bid. Below is a Deal Lifecycle of a potential Microsoft Acquisition:
Acquisition Strategy & Market Evaluation:
1. Define core acquisition strategy and rationale
2. Understand the market landscape
3. Identify key acquisition target
Strategic Due Diligence:
1. Understand the strategic fit with Amazon
2. Test assumptions/projections & their likelihood
3. Assess customer base and wider market
1. Show Amazon’s intent to acquire Microsoft Azure
2. Make initial bid based on valuation models
Full-Scope Due Diligence:
1. Deep analysis of financial performance
2. Assess contracts and liabilities
3. Understand regulatory considerations
Final Bid & Negotiation:
1. Submit the final bid with due diligence findings considered
2. Review Share Purchase Agreement
1. Consider how to structure and finance the acquisition
Complete Purchase & Integration:
1. Create a detailed integration plan of Microsoft into Amazon
2. Re-structure to obtain optimum Business Model
Global cloud infrastructure service revenues amounted to just over $30 billion in Q2 of 2020 (Statista, 2020). Bringing the total for the past 12 months to $111 billion (12 months ended 30 June 2020). How much of Amazon’s revenue comes from AWS? AWS revenue accounted for 13% of Amazon’s total revenue (AWS earnings Q2 2019). According to Park My Cloud, AWS produced a revenue of $10.8 billion for Q2 2020 compared to $8.3 billion in Q2 2019. This shows a 29% growth in revenue between 2019 and 2020. This respective annual growth in revenue will somewhat act as a motivation for Amazon to buy Microsoft. However, it is definitely hard to know what such a large acquisition looks like behind the scenes. Bezos seems rather optimistic about the future of AWS having said, “AWS has the unusual advantage of a seven-year head start before facing like-minded competition. As a result, the AWS services are by far the most evolved and most functionality-rich”.
However, expenditure is certainly a key barrier here. Microsoft Corporation (MSFT) has an enterprise value of $1.49 trillion, thus why this is no easy deal. Microsoft Azure falls under the “intelligent Cloud” business which grew 17% to $13.4 billion. Although AWS has the lead, its overall share of the market is slowly shrinking, while Azure grows. Hence why Amazon acquiring Microsoft might be the way forward when it comes to exerting dominance in the teleconferencing market. However, acquisition of the Microsoft enterprise is likely to work better as a long-term goal but as of now, we can imagine an avenue where Amazon focuses on the Azure business of Microsoft and buys that, with Teams as the cornerstone of that deal.
The impact of COVID-19 presents an opportunity for Amazon to acquire competitive companies such as Microsoft Azure with significant customer bases. On the buyer side (i.e. Amazon), fundamentally to grow your business, you have to decide between buying a company, asset, stock etc, and growing organically – where instead of buying another business, you launch another business or division. Amazon may want to go down this path; however, barriers to entry will certainly be an obstacle here including Azure’s current market base. Therefore, to avoid any complications, a company like Amazon might view it as easier just to buy their way in. Google and Facebook are big acquirers; they buy their way into markets. For instance, Facebook bought WhatsApp - why did they do that? There was no revenue at the time, but they are looking to buy technology and the user base to progress quickly and were willing to pay a few billion dollars to secure that business success.
It is interesting to think about what will happen if another party could get involved and how that could play a role in a potential Amazon-Microsoft deal. For example, Microsoft had shares in Apple from 1997 and sold them in 2003 for $150 million. Is there an extra motivation to cement their position of dominance, that feeling from rising from little brother to engulfing big brother or might this step be more of a Steve Jobs phenomenon than a Tim Cook? Could securing a vital piece of the new way of work be too tempting that Apple would look to take hold of the market? Apple’s market cap is $450 billion greater than second-place Amazon; this may be the answer to the question. However, if we were to analyse the pros and cons of either company acquiring Microsoft Azure, it is sensible to note that such an acquisition is of a much greater benefit to Amazon than it is for Apple. The reason being that it is tough to break into the market or type of customer that they have not been able to get inroads with, in comparison to Amazon who has an existing customer base linked to AWS.
Prior to the acquisition, it is key to look into the target enterprise’s financial health over a series of time. Microsoft’s financial health has fluctuated over time and has most recently seen a debt/equity ratio of 1.5. If Amazon were to acquire Microsoft Azure, it would need to make sure that if there is debt on the business, it should be taken over. Being unable to cover the debt would place Amazon in a difficult position in terms of piling up unwanted debt on their newly acquired business. It is really important as the buyer, if you are not going to take on the debt or if you are not able and willing to take on the debt, it is crucial to have it paid off by Microsoft before the acquisition. With Amazon’s healthy financial statistics, acquisition of Microsoft Azure may be the next trending market deal to date.
Mariam Hamze is a BSc Economics student at Greenwich University, looking to pursue a career in mergers & acquisitions.