Microsoft analyzed its financials and projected slowing growth if it maintained its current business model. It identified five promising new markets: electronic mail, databases, personal finance, video on demand, and e-commerce. These markets were in early growth stages but projected to experience high growth. Microsoft planned to enter these markets by developing capabilities in related sectors like telephone networks, cable networks, online networks, electronic shopping, and business networks. It identified Intuit as a potential acquisition that would help enter personal finance and e-commerce markets.

1. MICROSOFT MARKET ANALYSIS
Growth prospects, future visions and the acquisition of Intuit
DECEMBER 18, 2015
SHUANG ZHENG, HANJIE OUYANG,
QUENTIN ROBERT AND ROBERT HOLLAND
Northeastern University

2. Tableof Contents
1 Introduction...............................................................................................................................................3
2 Market overview.......................................................................................................................................3
3 Analyzing our Financials............................................................................................................................4
4 Our Future Plan .....................................................................................................................................5
4.1 Our Vision ...........................................................................................................................................5
4.2 Required Capability Sectors - Market Research.......................................................................6
4.3 Market Entry ......................................................................................................................................9
5 Intuit Analysis ......................................................................................................................................12
5.1 Financial Statement Analysis ......................................................................................................12
5.2 Discounted Cash Flow Model......................................................................................................15
6 Synergy of Intuit’s Acquisition........................................................................................................17
7 Conclusion............................................................................................................................................18
References....................................................................................................................................................19
Data Sources................................................................................................................................................19
Appendices...................................................................................................................................................20

3. 1 Introduction
With another year coming to an end, we have an opportunity to look back and reflect on our industry’s overall
performance. We find that the packaged software industry is growing rapidly but with discrepancies among
its segments. Notably, the areas in which we have historically generated our growth from seem to be slowing
as competition increases and low hanging fruit have been exploited. This is further supported by our analysis
of our financials which revealed a decreasing growth over the last three years. When conducting a status
quo analysis this results in our firm delivering underwhelming returns to our shareholders. In order to stay
ahead of this looming issue we need to diversify our product offering and as such have conducted a analysis
of a number of potential target markets. Wefound that the mostpromising prospectlies in the cashacquisition
of Intuit for $1.5 billion. The following report provides supporting material that has enabled us to come to this
conclusion.
2 Market overview
The computer software and networking sectors include three industries: computer programming services,
prepackaged software and computer-integrated-systems design. In spite of the weak worldwide economy,
U.S. computer software and networking industries fared relatively well in 1993 and are expected to continue
to do so over the next decade. In general, these industries are young, competitive, innovative and
entrepreneurial, and face good opportunities for increased sales worldwide. According to Business Week,
sales of 19 major software and services firms, including Cisco Systems, EDS, Oracle, Novell, Lotus and
Microsoft, increased by 15% between Q2 1992 and Q2 1993, while profits also grew 44% to a staggering
$827 million. We are pleased to announce that, with EDS, we make up 40% of total sales and 54% total
profits.
In more good news for us, the packaged software industry was one of the fastest growing sectors of the U.S.
economy in 1993, growing by 12.6% reaching $32 billion in 1993. It is madeup of application tools, application
solutions and system software. Among these segments, application tools (data management, manipulation
and program design was the fastest-growing category) grew 15.4% over the year. The largest segment
remains application solutions, i.e. programs that perform specific business functions, which grew to $12.4
billion up by 11.8%.
However, we are concerned that growth has varied considerably among different types of applications.
Among the fastest growing tools, we found Home education software (up 75% since the second half of 1992)
and databases/productivity software (up more than 65%). While these provide great upside for our firm, data

4. suggests that the source of our more predominant segments, desktop publishing (Word), spreadsheets
(Excel) and graphic software (PowerPoint) witnessed declining sales1,5
.
3 Analyzing our Financials
After observing declining sales in our most prominent market segment we analyzed our financials and
projected future growth assuming status quo. We found that over the last three years, our Net Income has
been growing at a 42.36% compounded annual growth rate (CAGR). However, when taking a closer look,
Net Income has been growing at an average decreasing rate of 31.99% and more worryingly has been
accelerating, rising to 41.5% in 1994. This is the result of slowing revenue growth and in spite of continuously
improving operating efficiency. Indeed, despite growing at an impressive three year CAGR of 40.8%, our top
line has been growing at a decreasing rate, 34% on average for the last three years. We are pleased to say
that over the last five years, we have been able to continually improve our efficiency highlighted by the year
on year (YoY) increase our Operating Margin as a percent of net sales, growing from 33.2% in 1990 to 37.1%
in 1994 (Exhibit 1). This was driven by steadily decreasing Cost of Goods Sold (COGS) and stable Sales,
General & Administrative Expenses (SG&A) as percentage of net sales (Exhibit 1).
Assuming status quo, we project that the observed decrease in Net Income will continue, driven by the
sustained decline in Net Sales and steadily stabilizing Operating Margins (Exhibit 2). To stay consistent with
our ‘present state of affairs’ analysis, we estimated Depreciations, Capital Expenditure and change in
Working Capital as percentages of Sales, by using a floating converging average.
Exhibit 2: Assumptions
1995 1996 1997 1998 1999
Net Sales Growth Rate (YoY) 21.5% 19.4% 17.5% 15.8% 14.3%
Operating Margin 38.1% 39.4% 40.6% 40.6% 40.6%
Depreciation as a % of Sales 4.0% 4.0% 3.5% 3.5% 3.5%
Capital Expenditure as a % of Sales 5.8% 9.0% 11.0% 11.0% 11.0%
Change in Working Capital as a % of Sales 5.0% 5.0% 6.0% 6.0% 6.0%
1 (Fruhan, 2001)
Exhibit 1: Key Historical Metrics
1990 1991 1992 1993 1994
Net Sales Growth Rate (YoY) - 55.8% 49.7% 36.0% 23.9%
Cost of Goods Sold as % of Sales 21.4% 19.6% 16.9% 16.9% 16.4%
SG&A as a % of Sales 45.4% 45.1% 47.0% 47.8% 46.5%
Operating Margin 33.2% 35.3% 36.1% 35.3% 37.1%
Net Income Growth - 65.9% 52.9% 34.6% 20.3%

5. From these assumptions and others, including WACC (6.92%) and terminal growth rate (4%) (Appendix 1),
we derived an equity value of roughly $44.5 billion translating to a $81.76 target price compared to our current
$81 stock price (Exhibit 3).
Exhibit 3: DCF Model (in Million USD)
Enterprise Value (EV) $40,813
(+)Last Year Cash & ST Inv. $3,614
(-)Mkt Value of Debt (LT+ST) $0
Equity Value $44,427
This low projected growth signals that we need to diversify our product offerings to boost our top line and
continue to generate wealth for our shareholders. In this exciting time for the computer software and
networking sector there are many available options for us to pick from.
4 Our Future Plan
4.1 Our Vision
Given our desire to continue to grow and create shareholder wealth, we need to find and exploit new
opportunities and ventures to ensure future cash flows. We could look to vertically integrate which would
allow us to create new profit areas in our current sector or we can expand into new markets in order to create
new profit streams. The latter option is more appealing due to high levels of innovation and progress in the
industry, in addition to the fact that we already have substantial market dominance in our current operational
areas.
We predict that the future will see a shift away from current desktop computing to a world where computing
will be mobile and where the dominant firms are those who command networks and their content. Therefore,
shifting towards online formats is necessary and over time Microsoft can be the main beneficiary of the
transition to this new wave of technology2
.
We have identified five areas which we believe will allow Microsoft profit from future market developments.
These include:
 Electronic mail, Informational databases, Personal financial management, Video on demand and
Electronic commerce
Our vision for moving into these five areas can be separated into two markets, the Home Entertainment
market and the Electronic Commerce Market1
. Forecasts suggest that these are likely to be high growth
markets given that currently less than 10% of PC users have access to email connected to the internet, less
2 (Bloomberg, 1994)

6. than 7% of PC users have real time internet access and only 1% of the world’s population have access to
internet3
.
In order to access these markets, we need an online system. Our aim is to incorporate this new system into
Windows 1995, allowing all operating system customers access to new network tools. Currently Microsoft
Network has less access to online content than our rivals, in particular the large amounts of software and
information available on other systems.To ensure that our system becomes more competitive to vast number
of people who will have direct access we need to develop capabilities a number of areas.4
4.2 Required Capability Sectors - Market Research
4.2.1 Telephone networks
Telephone networks are already a big business and we expect them to be a vital part of our vision. We require
access to these technologies in order to deliver the information to our systems so that our products and
services can run effectively5
. This will be vital if we are to successfullycompetein a video on demand market.
Industry specialists now foresee a removal of the distinct lines that currently divide the computer, telecoms
and cable industries.
Currently in the telephone network market, AT&T corp. is the market leader with 34.5% market share and a
number of smaller companies make up the rest of the market, with between 5 and 10% market share each.
AT&T could become a large competitor, with them well placed to start to deliver services to customers,
especially as the communication and computer markets start to converge6
.
3 (Albert, Berkowitz, Graumann, Kniffin, & Reynolds, 1996)
4 Our Vision Section – Information taken from Harvard Business School Case Study
5 (US Department of Commerce, 1994)
6 (Page, 1995)
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Chart 1: US Cell Phone Revenues Chart 2: US Cell Phone Subscribers

7. 4.2.2 Cable Networks
Access to cable networks will also provide a vital part of a move in to the home entertainment sector. Again
this is a well developed market with access to a large proportion of the population. This market has shown
stable growth in both subscribers and revenues and this is expected to continue over the next few years5
.
The cable network market has more firm diversification than the telecom market, with the largest firm, Tele-
com Inc. having a market share of 17.5%, ahead of Time Warner Inc. who have a market share of 11.9%.
There are only four other competitors in this market.
4.2.3 Online Networks
Online networks are a relatively new market but our transition into this area is required if we wish to realize
our vision. Online network capability will allow ‘on demand’ services as well as ensuring that our systems are
capable of accessingavailable electronic commercesites.In addition, creating more efficient online networks
will allow for greater access to informational databases as well as email which are two of the five areas of
our future vision.
Prodigy and Compuserve are the market leaders with 41% and 33% market share respectively. America
Online has a small market share at 10% (expected to increase to 22% in 1994) and then other firms make
54
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US Cable Subscribers (% of Households)
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Chart 3: US Cable Subscribers Chart 4: US Cable Revenues
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Chart 5: US Internet Traffic

8. up the remaining 16%. These companies do not currently offer solutions which are capable of fulfilling all of
our needs in the online network market.
4.2.4 Electronic Shopping Networks
The Home Shopping market is very concentrated, with only two firms, Home Shopping Network and QVC.
This market is very much still emerging but those in the retail sector have began to realize that the future of
much of the market will be online or in an interactive setting7
. Those in the market have already began to
position themselves to move part of their business online with Home Shopping Network acquiring Internet
Shopping Network. In addition to this a number of street retailers, including Macy’s, Spiegel and Saks Fifth
Avenue now feel that electronic shopping will play an important role in their future.
Those who have already entered the electronic market have not been able to make a sizable impact, and a
number of companies who have tested the water have then deciding the bottom line was not good enough
or the levels of exposure were not high enough to make this a successful venture at this time8,9
.
Despite this, projected growth of 20% this year makes this market high growth and therefore high opportunity
and these growth rates are expected to continue as the internet grows exponentially10
. These growth rates
are why a number of our competitors including MCI, IBM, Apple and AT&T are becoming actively involved in
the electronic market8
.
4.2.5 Video on Demand
It is expected that the multimedia market will take off in the late 1990s, and video on demand is one of five
segments in the under the multimedia umbrella5
. This market is currently dominated by a number of large
companies, of which, many have formed alliances in order to reduce risks, spread costs, and allow transfer
7 (The New York Times, 1994)
8 (Strom, 1994)
9 (Benjamin, 1996)
10 (Dholakia, Fritz, Dholakia, & Mundorf, 2002)
0
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Home Shopping NetworksSales ($m)
Chart 6: Home Shopping Network Sales

9. of knowledge in a speed up the rate at which multimedia products come to market. Examples of current
collaborations in this market include, Time Warner and US West; IBM, NBC Television and NU Media Corp5
.
As a company we intend to invest in a number of multimedia ventures going forward. We have already
created an alliance with Intel and General Instruments to develop a new digital TV set top box. To move
forward within this market, we will need to be able to run a sophisticated database which is able to send video
signals to households and track payments. In this respect, Oracle Systems Corp. is currently much better
placed in this market due to its background in digitalized databases, but even they are far from being close
to market in this area. In addition to this we will require access to cable or telephone networks in order to
deliver the digitalized content3
.
4.2.6 Business Networks
Business networks have shown substantial growth in recent years, with the number of PCs connected to LAN
networks increasing 33% between 1992 and 1993, and this represented an increase of revenues of 23%5
.
Those in the industry suggest that there is considerable space in the remote connectivity industry which is
yet to be exploited4
.
Novell Inc. currently has the largest market share in this market, at around 66%. Other companies in the
market have much smaller market shares, with IBM at 7% and Banyan at 6.5%. Microsoft’s interest in the
business network market has been growing steadily over the last 3 years but as a company we were late to
the market which reflects in our low market share, currently 8%. As a company we have already introduced
Microsoft at Work which facilitates communication between PCs, Phones and fax machines. As part of our
business systems offering we also provide Microsoft LAN manager which offers clients the ability to share
files and devices as well as perform remote processing11
4.3 Market Entry
Our large supply of cash reserves is sufficient to fund the company's investment in R&D, strategic ventures
or to acquire new technologies and companies. However, movement in some of these markets may bring
our market power to the attention of antitrust regulators so we muchbe careful when choosing which strategy
to take.
11 (Microsoft, 1994)

10. 4.3.1 Telephone networks
Entry to this market provides us with an interesting challenge. As this is already as well developed sector
with some large players in the market, building internally does not seem like a viable option. Therefore, a
joint venture or an acquisition are the options available to enter this market.
At this stage a strategic alliance seems the most applicable to help to achieve our vision. This is due to the
already highly developed and competitive nature of the market and our current lack of knowledge and
exposure in this market. AT&T would be the most desirable partner in this market due to their high customer
base and relationship with these customers. AT&T is also looking to move in to the online market so a
strategic alliance could be mutually beneficial as we could combine expertise to create a large power in the
online market3
. Sharing knowledge in this area could also lead to developments in the video on demand
market as telephone networks are an important part to get this type of system up and running. This will be
particularly important given that the telecom and computer markets are beginning to converge.
4.3.2 Cable Networks
Although a developed industry, the cable industry is fragmented with no market leader. In addition to this the
cable market was re-regulated in 1992 and it was recommended that there should be more competition in
this market5
. The cable industry is also expected to benefit for an increase in multimedia services.
As part of our vision moving to more to multimedia services we could benefit from acquiring a cable network.
Wefeel the bestoption is buying a company with a low market share and then using our company’s reputation
to expand the customer base as well as offering new services which differentiate our cable service from the
rest of the market. The best target for us in this market is currently Cablevision. Cablevision appears to have
a steady market share which has been increasing over the last 5 years. As well as this their market value
appears to be low compared to competitors in the industry. Given this we would look to increase their value
over time to something more inline with their competitors, giving us a large potential capital gain over time.
Cablevision’s current market value is $1.49bn. Due to the large cash reserves available to us we would look
to complete this deal in cash as this is the cheapest format available to us. It is likely that we should expect
to pay a premium of around 20 to 25%. This would mean that the cost of this acquisition would be between
$1.79bn and $1.86bn. We believe that this offers good value for money for both parties as it a concentrated
sector which Cablevision is under pressure in and also continues to offer our shareholders plenty of room for
future growth.

11. 4.3.3 Online Networks
The online market is one which is vital to our future vision. Within the online market we feel that America On
Line (AOL) provides a good option as an acquisition target. As a company its market share is expected to
grow substantially, and its ease of use makes it consumer friendly so this is a further string to its bow3
. In
addition to this it has a relatively low market value which means that an acquisition will not require huge
amounts of resources, and as it is publically listed unlike its competitors it may be easier to acquire. We feel
that AOL will allow for continued growth and will mean that we will be able to develop stable cash flows for
our shareholders.
An acquisition of AOL will enable us to achieve our vision in a number of ways. Firstly, AOL already has an
international email gateway which works with a number of mail users accounts. This would fulfil our desire to
gain a foothold in the email market. As well as this, we require online systems to expand in to the other
markets in our future vision, including video on demand and electronic commerce. AOL has developed a
system which works with our Windows operating system and therefore the links between our company’s
products are already established. AOL has been proactive in moving to portable devices with online services
and this fits with our vision12
.
At the end of 1993 AOL had a market value of $218m and we would expect to pay a large premium on this
amount to be able to acquire then given their large growth opportunities. A premium of around 150% would
seem appropriate given their increasein market value from the previous year. This means the value we would
have to pay is in the region of $550m. Again our cash reserves are large enough that we are able to make
this purchase in cash which reduces our costs of acquisition.
4.3.4 Electronic Shopping Networks
As found in our market research the Electronic shopping market is very condensed. As a results the best
option would be to move in a separate direction to the prevailing market and make use of our own strengths.
Weforesee, as muchof the market does, that there will be a shift towards online shopping. With our expertise
and our vision to shift towards online services, building an online shopping network would appear to be
beneficial to our long term growth prospects.
12 (McCracken, 2010)

12. 4.3.5 Video on Demand
Within the video on demand markets our options are limited as there are only a few companies who are
directly looking to enter this market and systems are still in development. As a result, continuing to internally
develop systems appears to be the best strategy at this stage. Despite Oracle currently being better placed
to enter this market if we develop our capabilities in the other areas which we are discussing we will have
more access to the video on demand market and therefore can get products to market quicker and gain more
market share.
4.3.6 Business Networks
Given that we have already made steps in to the business network market we feel that currently we should
continue to internally develop. The new systems that we have introduced are in their infancy and therefore
we should give these time to develop before looking at possible acquisitions. Our market share in the first
three years in this market has been relativity stable and with only one competitor larger than ourselves and
we can see real possibility to capture market share in this area, or at the very least increase revenues as the
market grows. Given that customers will have large exposure to Microsoft network we predict that our market
share will increase naturally, as will our LAN manager systems.
5 Intuit Analysis
5.1 Financial Statement Analysis
In this part, we analyze the financial statements of Intuit and compare the financial ratios of Intuit with those
of Symantec and Aldus, companies having similar market value in the same industry with Intuit.
5.1.1 Activity Ratios
Intuit’s days of outstanding sales have reduced significantly in 1994 and are smaller than comparable
companies Symantec and Aldus. It is likely that Intuit’s large increase in turnover has contributed to this fall.
However, this sharp decrease could become a disadvantage for Intuit if their aggressive credit policy begins
to hamper sales. Intuit’s inventory turnover and payables turnover were close to the industry norm, indicating
efficient inventory, trade credit and asset management.
Exhibit 4: Intuit Activity Comparables (Days)
Intuit Symantec Aldus
1993 1994 1993 1994 1993 1994
Days of Sales Outstanding 46.61 19.02 52.09 55.49 61.83 -
Days of Inventory on Hand 27.03 12.08 30.9 25.32 58.66 -
Days of Payables - 68.34 174.25 171.7 95.91 -
Cash Conversion Cycle - -37.24 -91.26 -90.89 24.58 -

13. 5.1.2 Liquidity Ratios
Intuit currently has good liquidity. Its current ratio is close to those of Symantec and Aldus while Intuit’s quick
ratio and cash ratios are lower than its current ratio, as well as being less than those of the comparable
companies. This indicates that inventories are a considerable part of Intuit’s current assets. Intuit’s 1993
acquisition of Chipsoft, the maker of the TurboTax and MacInTax tax preparation software products, has
caused a drain on their cash account. In addition, in 1994, Intuit acquired National Payment Clearinghouse,
an electronic service center. While these acquisitions were cash intensive, they allowed Intuit to provide more
complete financial services to its customers. Also, given Intuit’s low cash conversion cycle it is able to quickly
turn cash investment in inventories back into cash, enabling it to continue to be able to pay its short-term
liabilities.
Exhibit 5: Intuit Liquidity Comparables
Intuit Symantec Aldus
1993 1994 1993 1994 1993 1994
Current ratio 2.69 2.36 2.41 2.28 3.49 -
Quick Ratio 0.96 0.59 1.75 1.23 3.07 -
Cash ratio 0.32 0.39 1.11 0.45 2.07 -
5.1.3 Solvency Ratios
According to the debt-to-equity, debt-to-assets, and financial leverage ratios, Intuit relies slightly less on debt
as a source of financing that its competitors. In addition, Intuit had a high interest coverage, supported by its
high income, which implies it is exposed to low risk of failure when meeting its debt obligations.
5.1.4 Profitability Ratios
Intuit’s revenues have grown rapidly during the past five years, with over 200% inn 1989 and then stabilizing
somewhat to between 35% and 88% annually since then. Intuit’s growth rate since 1990 has been more
comparable with other companies in the market.
Intuits gross profit margin is slightly lower than that of Symantec and Aldus with means that Intuit spent more
on COGS as a percentage of sales. It is possible that this is due to Intuit having a lack of supplier power,
increasing the costs associated to their underlying products. Intuit’s operating profit margin and net profit

14. margin are similar to those of Symantec and Aldus. Our analysis shows that Intuit has similar overall
profitability performance to comparable companies, but Intuit has lower operating expenses which means it
is better managed with regard to its expenses.
Exhibit 7: Intuit Margin Comparables
Intuit Symantec Aldus
1990 1991 1992 1993 1990 1991 1992 1993 1990 1991 1992 1993
Gross profit
margin
0.64 0.65 0.65 0.68 0.86 0.83 0.77 0.82 0.8 0.81 0.77 0.8
Operating
profit margin
0.17 0.14 0.09 0.11 0.16 0.11 0.13 -0.03 0.22 0.18 0.03 0.05
Net profit
margin
0.11 0.1 0.06 0.07 0.13 0.08 0.09 -0.06 0.18 0.14 0.04 0.05
Intuit had a higher return on assets, compared to Symantec and Aldus, which indicates that Intuit is better at
marking use of its available assets than its competitors, showing Intuits high profitability compared to the
market.
Intuit also has a higher return on equity which implies its high profitability relative to funds invested by
stockholders. However, its ROE dropped sharply in 1993. Our DuPont analysis (Appendix 2) shows that this
may be a result of reduced asset turnover. In 1993, Intuit’s current assets increased significantly, possibly
due to their acquisition of Chipsoft.
5.1.5 Conclusion
From the analysis we have completed it can be seen that Intuit has a strong and successfulfinancial structure
which has allowed it to grow at high rates over the last 5 years. It has high levels of solvency and is highly
liquid. This combined with high profitability makes Intuit a desirable option for an acquisition.
-0.1
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1991
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Return On Assets
Intuit Symantec Aldus
Chart 6: Return on Assets

15. 5.2 Discounted Cash Flow Model
Our decision on whether to acquire Intuit will depend on the price at which we are able to purchase them and
our projected value of the company which we will calculate using the discounted cash flow (DCF) model.
5.2.1 Calculation of WACC
Before building a DCF model, we calculated the weighted-average cost of capital (WACC) of Intuit, using
their cost of debt and beta coefficient as well as the current risk-free rate and market risk premium.
The costof debt is set as 2.5% higher than the average 10-year treasury rate in 1994 (from YCharts) as Intuit
is likely to have to pay a large premium to investors on its debt. We used the average 3 month treasury rate
in 1994 (from YCharts) as the risk-free and the market risk premium is calculated as the value-weighted
return on all NYSE, AMEX, and NASDAQ stocks (from CRSP) minus the one-month Treasury bill rate (from
Ibbotson Associates)13
.Intuit has a beta coefficient of 1.39314
. From this we have calculated the after-tax cost
of debt as 5.67% and cost of equity is calculated by using CAPM, that is, 7.7%. Intuits balance sheet show a
capital structure in which 75.97% is equity and 24.03% is debt. This leads us to a WACC of 7.21% (Appendix
3).
5.2.2 Calculation of EBIT
We then calculated the unlevered free cash flow using the following equation: EBIT (1-Tax Rate) +
Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure. We derived our
assumptions based upon actual data from 1988 to 199415
(Exhibit 8).
Exhibit 8: Assumptions of Intuit Growth Rates
1994 1995 1996 1997 1998 1999
Net Sales 60% 70% 30% 20% 20% 15%
Cost of Sales/Sales 26% 33% 33% 35% 36% 36%
Customer Service and Technical Support/Sales 18% 20% 22% 24% 24% 26%
Selling and Marketing/Sales 22% 22% 24% 26% 28% 30%
Research and Development/Sales 11% 11% 14% 16% 18% 20%
General and Administrative/Sales 5% 10% 10% 12% 14% 16%
We concluded that the growth rates of net sales, cost of sales to sales ratio, customer service and technical
support to sales and general administrative to sales will increase from 1994 to 1995. This is due to Intuit’s
acquisition of the tax preparation software division of Best Programs of Reston and Parsons Technology from
13 Source: Kenneth R. French-Data Library
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
14 Beta taken from Bloomberg
15 Data taken from Intuits Financial Statements

16. Bob Parsons in 199416
. The growth rate of net sales is then predicted to decrease gradually after 1995 in
contrast to operating expense to sales ratio which we predict will increase with the company’s development
and the maturity of the market. At this stage, Intuit will need to spend more on service, marketing and R&D
to remain competitive. Using these predicted growth rates, we estimated Intuit’s future EBIT over the next
five years (Appendix 4)
5.2.3 Calculation of Total Cash Flows
To calculate free cash flow, we have made assumptions regarding depreciation, capital expenditures and
change in working capital as percentages of sales.
Exhibit 9: Intuit Assumptions
1995 1996 1997 1998 1999
Depreciation as a % of Sales 15.0% 13.0% 11.0% 9.0% 9.0%
Capital Expenditures as a % of Sales 8.0% 6.0% 5.0% 5.0% 5.5%
Change in Working Capital as % of sales 5.5% 5.0% 5.0% 5.5% 6.0%
Depreciation as a percentage of sales is predicted to decrease in the next five years because depreciation
will decline with time. We have kept the other two percentages at similar levels when forecasting forward.
For cash flows beyond the projected period, we assume a terminal growth rate of 4% based on the overall
performance of Intuit, capturing the terminal value of the business using the following formula:
CF1999*(1+Terminal Growth Rate)/(WACC-Terminal Growth Rate).
Furthermore, we made assumptions regarding tax rates which combined with those made above, enabled
us to calculate unlevered cash flows and total cash flows of Intuit from 1995 to 1999 (Appendix 5).
5.2.4 Calculation of Equity Value
Given the previous assumptions we calculated the enterprise value (EV) by calculating the net present value
of the projected total cash flows17
. The equity value that we used to evaluate Intuit was calculated by
subtracting net debt from EV.
Exhibit 10: Intuit DCF Valuation (in Thousands USD)
Enterprise Value (EV) $1,503,933
(+)Last Year Cash & ST Inv. $19,700
(-)Mkt Value of Debt (LT+ST) $58,770
Equity Value $1,464,863
16 The acquisition information is from WIKIPEDIA.
17 Source: https://www.business-case-analysis.com/discounted-cash-flow.html

17. 5.2.5 Conclusion of DCF Model
The equity value of Intuit is around $1.46 billion and the price that we are looking to pay for the acquisition is
$1.5 billion. The premium is close to $35,000, which we think is reasonable for the services that we will
acquire. Given our current excess cash it is feasible to conclude a deal with Intuit without leveraging debt or
changing our current equity. To do so we would use less than half of our $2.95 billion retained earnings which
will have no tangible effect on our solvency. This appears to be a more desirable option than issuing or
converting stockas it does not have a negative effect on the returns that our shareholders receive. In addition,
we believe that our stock is undervalued and financing this deal with stock would cause us to over-pay as
our value increases. This valuation appears to be sound and we will now conduct a synergy analysis to
estimate the added value which acquiring Intuit can add to our company.
6 Synergy of Intuit’s Acquisition
Now that we have determined that Intuit’s $1.5 billion asking price is one worth considering, we derived a
new DCF analysis to estimate the synergy premium we could generate from the acquisition.
We did so by adding Intuit’s income statement, balance sheet and cash flow to our own. When doing so, we
first assumed that Microsoft and Intuit remained two stand-alone firms behaving independently, growing at
the estimated rates used in their individual financial analysis. Before combining them to make a single firm,
we added a ‘Microsoft Net Sales Growth Premium’ to Intuit’s expected growth rate and a ‘Microsoft Operating
Margin Premium’, reflecting our belief that when incorporated into our structure, our new addition will grow
faster and be more efficient than previously expected (Exhibit 11).
Exhibit 11: Microsoft Premiums and Intuit’s New Rates
1995 1996 1997 1998 1999
Microsoft Growth Premium 20.00% 25.00% 30.00% 30.00% 25.00%
New Intuit Growth Rate (YoY) 84.00% 38.00% 26.00% 26.00% 19.00%
Microsoft Operating Margin Premium 25.00% 28.00% 25.00% 20.00% 20.00%
New Intuit Operating Margin as a % of Sales 19.56% 27.85% 25.34% 23.26% 19.88%
From this, we calculated our unified firm’s Net Sales and resulting EBIT. When estimating our combined firm
tax rate, depreciation, capital expenditure and change in working capital as percentages of sales, we used a
weighted average of the previously anticipated rates (Appendix 6).
From these assumptions and others, including WACC (6.92%) and terminal growth rate (4%) (Appendix 6),
we derived an equity value of roughly $54.6 billion translating to a $100.82 target price compared to our
current $81 stock price (Exhibit 12).

18. Exhibit 12: DCF Model (in Million USD)
Enterprise Value (EV) $51,049
(+)Last Year Cash & ST Inv. $2,114
(-)Mkt Value of Debt (LT+ST) $0
Equity Value $53,163
We observe that by merging our firms we can boost Intuit’s sales and optimize their processes, and generate
a synergy premium of roughly $8.77 billion (Exhibit 13).
Exhibit 13: Synergy Analysis (in Million USD)
Independent Firm Value $45,892.03
Microsoft Firm Value After M&A $53,163.68
Synergy Premium $7,270.65
This venture would help us maintain our historically high growth rate and generate significant returns for our
shareholders. Based off of this analysis we anticipate purchasing Intuit for $1.5 billion in cash.
7 Conclusion
As shown in the historical financial analysis, Net Income has been growing at a decreasing rate over the last
three years. Although this is not currently weighing on our shareholders, our status quo projections suggest
that our growth opportunities are limited and that our stockholders can expect underwhelming returns unless
we take action. After conducting intensive market research, we have identified Intuit as a realistic acquisition
target that would facilitate our firm to sustain its high growth rate while maintaining stable margins as
operational synergies are possible. This acquisition would enable us to ensure the high level of return on
investment our shareholders have come to expect from us in the past. Although at a steep premium, the $1.5
billion ask price is one that we are willing and able to meet with our conservative estimates hinting at a
potential $7.2 billion synergy premium. However, it must be noted that such an acquisition will not go
unnoticed and that our competitors will not take too kindly to such a move. This might prompt government
regulators to investigate us for potential breaches of antitrust laws for which we have been penalized in the
past. We do not expect this to occur however in the unlikely event that it does we need to be ready to shift
our efforts towards other opportunities. With that in mind we have identified the online network market as
being susceptible to a large player taking over. Within the industry, AOL seems the most obvious fit as it
would enable us to seamlessly integrate their systems with our and offer further expansion possibilities.

19. References
Albert, D., Berkowitz, D., Graumann, R., Kniffin, D., & Reynolds, N. (1996). Intuit Inc. On-line Banking. J.L.
Kellogg Graduate School of Management Northwestern University.
Benjamin, J. (1996). Megatrends in Real Estate. Boston: The American Real Estate Society .
Bloomberg. (1994, June 26). Bill Gate's Vision. Retrieved from Bloomberg:
http://www.bloomberg.com/bw/stories/1994-06-26/bill-gatess-vision
Dholakia, N., Fritz, W., Dholakia, R., & Mundorf, N. (2002). Gloabl E-Commerce and Online Marketing.
Westport: Quorum Books.
Fruhan, W. (2001). Microsoft/Intuit. Boston: Harvard Business School.
McCracken, H. (2010, May 24). A History of AOL, as Told in Its Own Old Press Releases. Retrieved from
Technologizer: http://www.technologizer.com/2010/05/24/aol-anniversary/
Microsoft. (1994). Annual Report. Redmond: Microsoft.
Page, A. (1995). Microsoft: A Case Study in International Competitiveness, High Technology and the Future
of Antitrust Law . Virginia: HeinOnline.
Strom, S. (1994, January 3). Testing the High Hopes for TV Shopping. Retrieved from The New York Times:
http://www.nytimes.com/1994/01/03/business/testing-the-high-hopes-for-tv-shopping.html
The New York Times. (1994, September 8). COMPANY NEWS; 2 Companies Advance On-Line Shopping.
Retrieved from The New York Times: http://www.nytimes.com/1994/09/08/business/company-
news-2-companies-advance-on-line-shopping.html
US Department of Commerce. (1994). U.S. Industrial Outlook 1994. Washington D.C: US Department of
Commerce.
Data Sources
Chart 1 - http://www.dtc.umn.edu/~odlyzko/doc/oft.internet.growth.pdf
Chart 2 - http://www.dtc.umn.edu/~odlyzko/doc/oft.internet.growth.pdf
Chart 3 - https://books.google.com/books?id=M9FXFmk7BBwC&pg=SA31-
PA1&source=gbs_toc_r&cad=3#v=onepage&q&f=false
Chart 4 - https://books.google.com/books?id=M9FXFmk7BBwC&pg=SA31-
PA1&source=gbs_toc_r&cad=3#v=onepage&q&f=false

20. Appendices
Appendix 1

21. Appendix 3 – Intuit Weighed-average Cost of Capital
Cost of Capital
Cost of Debt 9%
Tax Rate 37%
After-tax Cost of Debt 5.67%
Risk-free Rate 3.8%
Beta 1.393
Market Risk Premium 2.8%
Cost of Equity 7.7%
Capital Weights Amount (in Thousands USD) % of Total
Market Value of Equity $185,800 75.97%
Net Debt $58,770 24.03%
WACC 7.21%
Appendix 4 – Intuit EBIT Projections (in Thousands USD)
1994 1995 1996 1997 1998 1999
Net Sales 194,126 330,014 429,018 514,822 617,787 710,455
Cost of Sales 69499 108,905 141,576 180,188 222,403 255,764
Gross Profit 124,627 221,110 287,442 334,634 395,383 454,691
Customer Service and Technical Support 34,970 41,964 51,196 63,483 78,719 99,186
Selling and Marketing 41,814 51,013 63,256 79,703 102,020 132,626
Research and Development 22,057 24,483 27,911 32,377 38,204 45,845
General and Administrative 10,544 11,598 12,758 14,289 16,290 18,896
Charge for Purchased R&D 151,888
Amortization of Goodwill and Other 40,412 40,412 40,412 40,412 40,412 40,412
Operating Expense 301,685 169,471 195,533 230,264 275,645 336,965
Income from Operations (177,058) 51,639 91,909 104,371 119,738 117,726
Appendix 2 – DuPont Analysis of Intuit
0
0.5
1
1.5
2
2.5
3
3.5
1988 1989 1990 1991 1992 1993
DuPontAnalysis of Intuit
Tax burden Interest burden EBIT margin
Asset turnover Financial leverage

22. Exhibit 5 – Intuit Unlevered Cash Flow (in Thousands USD)
1994 1995 1996 1997 1998 1999
Tax Rate (1.0%) 39% 35.0% 35.0% 37.0% 38.0%
EBIAT (178,829) 31,500 59,741 67,841 75,435 72,990
(+)Depreciation and amortization 38,500 49,502 55,772 56,630 55,601 63,941
(-)Capital expenditures 17,900 26,401 25,741 25,741 30,889 39,075
(-)Working Capital (4,100) 18,151 21,451 25,741 33,978 42,627
Unlevered CF (154,129) 36,450 68,321 72,989 66,168 55,229
Terminal Value 1,787,950
Total CF (154,129) 36,450 68,321 72,989 66,168 1,843,179
Appendix 6