This week, reports emerged that Microsoft was in exclusive discussions to acquire messaging platform Discord for $10 billion. Then came a flurry of conversation around the logic behind the deal that surfaced the age-old "buy vs. build" debate.
Does it make sense for Microsoft to shell out billions in cash to acquire technology that they could likely replicate themselves for much cheaper?
There's no perfect answer when it comes to "buying vs. building," but in this case, we think the combination could result in a win-win for both companies and represents one of the most interesting deals to come out of the past year.
For starters, we think this deal originated less around an organic need to acquire specific technological capabilities, and was more borne out of the opportunity to put 1+1 together and get something worth more than 2.
Acquiring Discord would offer Microsoft immediate value in two important but historically discrete focal areas of its business: workplace messaging (which we suspect will become increasingly more consumer-oriented over time) and gaming (the original vertical that Discord built its brand around).
It would also extend Microsoft the highly-engaged consumer audience that it has been heavily Focused on attracting over the past few years.
For Discord, Microsoft offers the platform an attractive alternative to an independent IPO as well as a means through which to accelerate its growth beyond its current niche in gaming and consumer.
With workplace messaging platform Slack now backed by all of Salesforce's resources and seemingly pushing into Discord's core arena, Discord would likely find it significantly more challenging to carve a path forward independently than it would in Microsoft's hands.
We're optimistic on this deal and will be sure to keep tabs on it as the process progresses. With luck, we hope to see this become the icing on the cake of Satya Nadella's long history of visionary M&A as Microsoft's CEO.
What our clients own
For EXM Capital clients: (+) is a positive read-through, (-) negative, (~) neutral
Flagship:
(+) Charter Communications (CHTR) up +1% on bullish initiation report from Wells Fargo analyst. Broadband growth remains strong.
(-) Twilio (TWLO) down -7% as rising treasury yields maintain pressure on growth stocks. No change to our long-term thesis.
Opportunities:
(+) Five Below (FIVE) up +5% on improving analyst sentiment following a strong Q4 earnings report. Bullish on reopening potential for this retailer.
A detour
"Imagination is the highest form of research. "
Albert Einstein
