When Will Microsoft Buy Pandora Media Inc.?

Things haven't been working out well for Pandora Media (NYSE: P  ) investors lately. The shares fell 11% last week, and the streaming music leader's stock has plunged 35% since peaking in March. 

Yes, the shares had started to bounce back in the weeks leading up to last week's slide. Acquisitions in the industry -- from the $3 billion deal for Beats Music to the smaller buyout of Songza -- prompted speculation that Pandora would be taken out at a healthy premium.

But with two of the three titans of tech having made those two purchases it doesn't really open up a lot of possibilities for Pandora as a takeover candidate unless Microsoft (NASDAQ: MSFT  ) gets hungry.

It can happen, of course. Microsoft is a distant third when it comes to mobile operating systems, and now that its two larger rivals have signaled a healthier interest in digital music via Beats and Songza it wouldn't be a shock to see Microsoft pay up for the category leader. 

Microsoft doesn't have a problem paying billions to make up for lost time. It's what it did with aQuantive for an edge in online advertising, Skype to get up to speed with Web-based communication, and more recently the purchase of Nokia's handset business to have more say in the fate of Windows Phone.

Buying Pandora would fit right in with the reasons for Mr. Softy's three largest acquisitions. Streaming music is a major component of the enjoyment of tablets and smartphones, the two computing gadget categories that are growing at the expense of Microsoft's stronghold of desktops and laptops. Microsoft tried to make a bigger play in digital tunes with the late 2012 rollout of Xbox Music, but clearly that hasn't been enough.

Pandora closed out the month of May with 77 million active listeners, far more than any other streaming music platform. Growth is slowing. Listener hours and active listeners grew just 12% and 8%, respectively, in its latest quarter. But Pandora's milking more money out of its advertisers, with its top line soaring 54% in its latest quarter.

Pandora's coming into its own. Decelerating usage growth is still growth, after all. Pandora has turned the corner of profitability. Analysts see net income nearly tripling to $0.17 a share this year, and nearly tripling again to $0.49 a share come 2015. 

This doesn't mean that Pandora wouldn't welcome a buyout opportunity. As rosy as its future may be, there are also new uncertainties with the two largest players in mobile software beefing up their presence with acquisitions this year and tens of billions in the bank to make sure that they get what they want. Music royalties are also moving higher, potentially making it harder to remain profitable given its model that relies largely on free ad-based listening. Pandora won't come cheap, but if Microsoft is willing to overpay -- and historically it has done exactly that in cutting 10-figure checks -- the two could make beautiful music together.

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