Earlier this year, TechCrunch reported that software giant Microsoft (NASDAQ:MSFT) was seriously contemplating making a whopping $8 billion offer for Slack, the red-hot enterprise messaging start-up. Just a few weeks later, Slack closed a $200 million funding round that valued the company at $3.8 billion, slightly lower than the $5 billion valuation that it was shooting for but still higher than the prior 2015 valuation of $2.8 billion. Needless to say, the theoretical Microsoft offer would have represented a massive premium at the time.
Instead, Microsoft is now hard at work on its own competing enterprise messaging service called Skype Teams, according to MSPowerUser. The new messaging app hopes to take on Slack directly, and even looks eerily similar in terms of the user interface. Microsoft is reportedly planning on adding features that Slack lacks, such as threaded conversations and messages. Naturally, it will integrate with Office 365 for easy access to files, which Slack also lacks.
It's probably better this way.
It's definitely cheaper this way
Bill Gates, who remains a "technology advisor" to Microsoft, and CEO Satya Nadella weren't keen on the idea of acquiring Slack, preferring to build similar functionalities into Skype. That's apparently exactly what the company is doing.
But the main reason why investors should be grateful that Microsoft has chosen to compete instead of acquire is that Microsoft doesn't have a great track record with multibillion-dollar blockbuster acquisitions. Remember aQuantive or Nokia's handset business, for starters, each of which entailed billions of dollars of writedowns and other impairments. Frankly, I'm a bit surprised that the original $8.5 billion acquisition of Skype has held its own on the balance sheet for so long. Adding another theoretical $8 billion acquisition of Slack on top of that seems ill-advised, and would have resulted in quite a bit of goodwill.
Meanwhile, Microsoft is in the midst of trying to close its super-massive $26 billion acquisition of professional network LinkedIn, so clearly it has its hands full on the acquisition front.
It remains to be seen whether or not Microsoft can put a dent in Slack's growth trajectory; Slack said in May that it now has 3 million daily active users and 930,000 paid seats. While that may seem modest compared to Microsoft's global enterprise customer base, we're still talking about a company that launched just three years ago.
Microsoft certainly has a good chance at competing here. We're talking about the company's home enterprise turf, after all. The good news is that developing and competing is a whole lot cheaper than acquiring and writing down.
Evan Niu, CFA and The Motley Fool own shares of LinkedIn. The Motley Fool also owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.