News and Commentary: Microsoft Drawn to Visio

Microsoft Drawn to Visio

By Richard McCaffery (TMF Gibson)
September 15, 1999

It may be small potatoes for a Rule Maker like Microsoft (Nasdaq: MSFT), but the company's proposed $1.3 billion stock purchase of design software firm Visio (Nasdaq: VSIO) should add a sharp tool to its Business Productivity Group.

Headed by Bob Muglia, Microsoft's productivity group is one of the company's five major business units and manages the development of critical products such as the Microsoft Office suite. That's where Visio fits in.

Founded in 1990, Visio's graphics software allows nonspecialists to design drawings that range from organizational charts to advanced schematics for electrical engineers. Visio has had tremendous success overseas. Its products are available in 12 languages and 45 countries, and international sales represented 41% of its $166 million in sales last year. Customers include Hewlett-Packard (NYSE: HWP) and BP Amoco (NYSE: BPA).

Visio's products are all based on the Windows operating system. The company has worked closely with its Seattle-based neighbor for several years, realizing the importance of making its products compatible with popular applications such as PowerPoint and Excel. Microsoft has some design software of its own in Visual Studio, a product that's part of its developer's group.

Over the years, Microsoft has proven skillful at acquiring technology, and since design software is not exactly what you'd call a strategic focus for Microsoft, the acquisition makes good business sense. Why spend a fraction of your $3 billion research and development budget designing niche software when you have a collaborative relationship with a company right up the street?

Besides, the company happened to be trading at a discount to its 52-week high. Shares of Visio tumbled $10 to less than $30 per share in July when the company pre-announced lower than expected earnings for the third quarter because of slow sales related to a soon-to-be-released product. In August it released Visio Standard 2000, an expanded version of one of its workhorse products. This application will be followed in the coming months by the release of a full line of upgraded products, which should spur sales. Microsoft's worldwide distribution channel should help with this, to say the least.

As far as the size of the market for design software, it could get a lot bigger if Visio achieves its goal of making its products the industry standard. Microsoft has some experience with this. Of the roughly 120 million businesses that use Microsoft Windows worldwide, Visio estimates 28% create at least six drawings per month. That works out to a target audience of about 34 million businesses, and Visio has just 3.2 million units installed worldwide.

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