Do Microsoft Acquisitions Benefit the Computer Industry?

We examined whether acquisitions by Microsoft Corporation affect the stock prices of its competitors in the computer industry. We found that Microsoft's acquisitions in the Internet/online-services segment adversely affect the stock prices of the Internet/online-services rival portfolio. These competitors appear to be threatened by Microsoft's moves—anticompetitive or otherwise—to further its industry leadership and affirm the future success of the targets' technologies. Furthermore, the results of our study do not indicate that the financial market perceives Microsoft's operating-system acquisitions to be instrumental in achieving synergies from Microsoft's dominant role in the operating-system segment to the detriment of its Internet/online-services rivals. Indeed, we found the portfolio of Internet/online-services rivals to respond favorably to Microsoft's operating-system acquisitions, perhaps because Microsoft is essentially diverting resources away from the Internet/online-services segment. Microsoft Corporation is frequently under attack for anticompetitive behavior. Some studies do not show, however, that the financial markets believe Microsoft's behavior is anticompetitive or that the antitrust actions are beneficial for Microsoft's competitors. In this article, we examine Microsoft's impact on its competitors with a focus on whether acquisitions by Microsoft affect the stock prices of its competitors. Acquisition announcements by Microsoft might cause analysts to reassess the competitive positions of companies in the computer industry for several reasons. First, an acquisition by a well-established and fiercely competitive rival might be viewed as an endorsement of the target's technology, management, or other unique skills. Second, some market participants might hold the more extreme view that Microsoft acquisitions are part of a broad strategy to actually eliminate its competitors. Thus, the expected future cash flows and stock prices of Microsoft competitors are likely to be negatively affected by announcements of Microsoft acquisitions. To test the reactions of competitors' stock prices to Microsoft acquisitions, we identified a sample of 46 acquisitions conducted by Microsoft between 1987 and 2000. Using standard event-study methodology, we assessed the stock-price reaction of Microsoft as well as the reaction of portfolios of rival companies in the computer industry. Our findings show that when Microsoft announces an acquisition meant to augment its operating-system offerings, the stock-price response of Microsoft is positive, which is consistent with Microsoft maintaining and/or increasing its dominant role in this industry segment. We found that Microsoft's acquisitions in the Internet/online-services segment adversely affect the stock price of a portfolio of its rivals in this segment. This negative response by competitors differs from previous related research. Past studies found that the stocks of rival portfolios benefit from acquisition announcements, either because the acquisition indicates favorable future industry conditions or, when industry consolidation is expected, because the rivals are viewed as potential targets. Our findings suggest that the Internet/online-services competitors are threatened by Microsoft's moves, anticompetitive or otherwise, to further its industry leadership and affirm the future success of the targets' technologies. We did not find that the financial market perceives Microsoft's acquisitions in the operating-system segment to be instrumental in achieving synergies from its dominant role in that segment to the detriment of its Internet/online-services rivals. Indeed, we found that the stock price of the portfolio of Internet/online-services rivals responded favorably to Microsoft's acquisitions in the operating-system segment, perhaps because Microsoft is thereby essentially diverting resources away from the Internet/online-services segment.