Microsoft Adds Social Network Yammer

Microsoft Corp. (MSFT - Analyst Report) announced that it has entered into a definitive agreement to acquire Yammer for $1.2 billion in cash. The boards of directors of Microsoft and Yammer have approved the deal but the acquisition is subject to customary closing conditions, including regulatory approval.

Yammer, the San Francisco-based social networking site, specializes in creating private social networks so employees within the same company can form groups for free interaction. The firm has 5 million corporate users and its clientele includes Ford Motor Co, Supervalu and Deloitte.

Yammer will join the Microsoft office division and the division president, Kurt DelBene will remain at the helm. It will continue to be headquartered in San Francisco and led by its current CEO David Sacks.

Microsoft will add Yammer’s corporate-social networking tools to its Office and SharePoint, its cloud-based enterprise offering that includes email, Web conferencing, file sharing and the Microsoft Office suite of Web applications. The acquisition will likely boost file sharing and chat capabilities within Microsoft Office, which generates more than half of Microsoft’s annual operating income. In fact, Microsoft Office’s SharePoint already features some of these capabilities, though they are not widely used in the corporate environment.

Last year, Microsoft acquired online chat company Skype for a massive $8.5 billion. The company also plans to integrate Yammer’s enterprise software offerings into the video-chat service Skype.

Yammer provides features similar to those found on Facebook Inc. (FB - Analyst Report). The purchase will help Microsoft compete with corporate-social features like Salesforce.com Inc.’s (CRM - Analyst Report) Chatter, as well as startups such as Jive Software Inc. (JIVE - Snapshot Report) and Asana Inc.

Reuters stated that Cisco Systems, Inc. (CSCO - Analyst Report) and IBM Corp. (IBM - Analyst Report) are already offering internal social-networking capabilities to their clients. While Microsoft appears to be way behind in the race, it has made a couple of big acquisitions and should not be written off just yet.

Very recently, Microsoft made a bold move by stepping into the intensely competitive tablet market with the launch of its Windows 8-based tablet named “Surface” to compete with Apple Inc.'s (AAPL - Analyst Report) iPad. Microsoft has designed Surface to run on the upcoming Windows 8, the biggest change to the company's operating system in nearly two decades.

We believe that Microsoft’s current investments are supported by its strong balance sheet and expect these to drive the next growth phase, improving prospects of market share gains.

In the near term, however, we expect growing optimism and believe that positive estimate revisions could raise the Zacks Rank from the current #3, which implies a Hold recommendation for the short term (1–3 months).