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3 Reasons Why Microsoft Has Been on a Spending Spree Lately

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Microsoft (MSFT - Free Report) has been on a shopping spree lately, acquiring a number of smaller companies from a diverse set of sub-industries. The trend was extended this week when the tech behemoth purchased Flipgrid, a Minneapolis-based startup which created a social learning application for teachers and students.

The Flipgrid deal follows Microsoft’s massive $7.5 billion all-stock buyout of GitHub, the world’s leading open-source software development platform, and its acquisition of four separate video game studios which was unveiled at the Xbox E3 press conference.

Microsoft is certainly no stranger to M&A activity, but its recent spree still feels notable. So why exactly has the software pioneer decided now is the right time to cast a wider net over the tech sector? Let’s take a closer look.

 

1. Continued shift away from the PC

The personal computer has been losing relevancy in the global tech market for many years now, and that has posed a serious challenge for Microsoft, which built its legacy on the back of PC software.

One of the first indications that Microsoft was shifting its business model came during the release cycle for Windows 10, when the firm offered the new operating system as a free upgrade.

Microsoft opted to focus on selling additional features like Office 365, and although More Personal Computing remains the company’s top revenue driver, the focus is no longer squarely planted on selling OS packages.

Microsoft’s new business model has also freed up more room for additional focuses, most notably its booming enterprise cloud computing division. This underscores why Microsoft is scooping up a diverse set of companies; its structure is now more of tech umbrella like Alphabet (GOOGL - Free Report) than a PC software firm.

GitHub, Flipgrid, and the four game studios—Ninja Theory, Playground Games, Undead Labs, and Compulsion Games—give Microsoft even greater exposure to exciting growth markets outside of its traditional business.

 

2. Increased competition from tech rivals

Of course, breaking into new markets means Microsoft is faced with fresh competition from familiar names like Alphabet, Amazon (AMZN - Free Report) , and Apple (AAPL - Free Report) . Sometimes M&A activity is the best way to gain a leg up against your competition, and it seems like Microsoft has taken that stance as of late.

The Flipgrid acquisition is the perfect example. Microsoft was already interested in education technology—as evidenced by its policy of making Office 35 free to schools—but it needed something more if it wanted to beat Google Classroom and Apple’s ConnectED initiatives.

Microsoft is now making Flipgrid free for teachers and classrooms, meaning it is instantly a top choice in the edtech space. And oh by the way, Flipgrid was previously an Amazon Web Services customer and might just be able to make the switch to Microsoft’s Azure.

 

3. Sector-wide inflection point

It is also important to note that Microsoft’s acquisition spree is coming during a major inflection point for the entire technology sector as the world’s tech leaders prepare for the impending artificial intelligence revolution.

Consumers might not be feeling the entire force of AI just yet, but with self-driving cars set to hit streets soon and significant progress being made in the fields of natural language processing and robotics, it will not be long until we start seeing life-changing developments.

Companies like Microsoft need to be positioned correctly as the power of AI starts to increase exponentially. The technology will affect all corners of the sector, including markets like open-source software, edtech, and video gaming. Microsoft’s latest acquisitions make even more sense with this mind.

 

Microsoft is currently sporting a Zacks Rank #3 (Hold). Current consensus projections have the company’s full-year earnings and revenue growth rates pegged at 6.4% and 15.5%, respectively. The stock has gained about 42% over the past year, including a 3.5% surge in the trailing month.

Want more market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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