1

Google Vs. Microsoft: An Analysis Moh'd Abu Hashish BUS 508 Dr. Sizer June 3, 2012

Google Vs. Microsoft: An Analysis Google and Microsoft have been at the cutting edge of some of the latest user-end technology in the last decade, alongside the ever growing competitive companies like Apple and Facebook, who just finally released their long-awaited IPO. What makes the competition between Google and Microsoft even more interesting is that they both have very similar market interests and develop many similar products where they are fighting for market share in both developed hardware and software. Google, with it's ever expanding resources, is taking on more competition than ever before with such products like Google Plus, a social networking platform similar to that of Facebook, its' Android phones and tablets; taking Apple, who's dominating the market, head on. Also beating down the door of Apple is Microsoft's Windows mobile devices which are catching the attention of many users, especially those who prefer an alternative.

Product success aside, both Google and Microsoft have Operating Systems (OS), mobile devices, leading internet search engines, and are looking to expand in very similar directions. Each of these products have provided different levels of success for the respective companies, where Google's operating system never really took off, and Microsoft's Windows OS has been dominate in the market place for years. Google Search has dominated internet searches and is Google's leading revenue generating product while Microsoft's Bing search engine has gained a lot of ground, especially since developing partnerships with other big information companies like Facebook who uses Bing in it's mapping applications.

Here, we will break down and analyze each of the senior technology company's balance sheets and financial statements, as well as management styles, in a comparative analysis and discuss the pros

3 and cons of investing in each. Both companies have proven very profitable, especially for early, longterm shareholders, and both have had to be maintain creativity in this ever changing technology market and during negative economic situations such as the recent recession.

Efficiency is always at the top of the list of concerns, especially in the competitive technology market. Although short-term debts have not been a major issue for either company in recent years, Current Ratio will help us get a quick view of each company's ability to pay off it's short-term debts by measure of liquidity. When it comes to liquidity, it seems Google is better able to manage its' smaller number of Total Liabilities of just over $9 billion, a Current Ratio of 5.91:1, compared to Microsoft, who's Total Liabilities are twice that of Google, with over $23 billion, with a Current Ratio of 3.78:1.

Google, with it's more manageable assets, is able to maintain a low Debt Ratio of 12.6% while Microsoft's current Debt Ratio is more than twice of Google's at 26.4%. Although Microsoft's Debt Ratio is considerably higher, neither company is in hot water, so-to-speak, while neither is having to finance their assets through debt, but are doing so through their own equity.

Both companies have a global reach with their products and also have assets in several countries, including operations offices, factories, etc. and both companies regularly purchase smaller companies such as Google's recent purchase of Motorola Mobility. Asset performance is a key function for any company. The Fixed Asset Turnover Ratio (FATR) will tell give us a current figure on how each company's fixed assets are performing. Google has a current FATR of 4.4:1 while Microsoft outperforms Google with a FATR of 9.0:1. Similarly, Return on Assets (ROA), sometimes referred to as Return on Investments (ROI), will tell us what has been earned from invested capital. Microsoft, probably due to it's higher retail price average of its' products, outperforms Google with a current ROA of 21.79% in the first

4 quarter of 2012 while Google showed a 15.8% ROA in the first quarter. A more useful calculation for companies in the same industry is the Return on Equity (ROE). It indicates the company's return on money from investors. Microsoft reported a 38.23% ROE in the first quarter while Google showed an ROE of 19.6%.

Dividends are cash payouts of shared company profits or surplus to shareholders. This is where Microsoft and Google are arguably divided when it comes to how they provide profits to shareholders. Microsoft's dividend payout ratio is currently at 26% while Google does not pay dividends. Although Google has quite a bit of cash on hand, it probably wouldn't be able to make such bold purchases as it did with Motorola if it were paying dividends. Many argue that Google should provide even a more nominal dividend that would yield 1% per quarter which would still allow buying power for the company. As of now, Google has no plans to provide dividends to shareholders.

Price per Earnings Ratios (P/E), although not intended to be a lone factor in investment decisions, will provide some insight into how investors feel about the future of the company's profitability. Microsoft's current P/E is 10.4:1 as reported in the first quarter of 2012. This means an investor is willing to spend $10.40 in order to earn $1.00 when investing with Microsoft. Google, with apparently higher investor confidence for its' future, has a P/E of 17.3:1, reported in the first quarter of 2012.

Each company dominates the market with their core products. Google Search is expanded and has been developed into an extremely complex internet search engine with extremely complicated algorithms tasked with ranking pages on the internet. With this massive tool, Google is able to generate billions of dollars annually with it's ad programs, Google AdWords and Google AdSense. Microsoft has a similar product; a search engined called Bing, which is gaining ground when it comes to pure number of users

5 using it. If Microsoft is planning to compete head on with Google for search engine space, they have a long way to go. But Microsoft's core business has mostly been with it's software, more specifically, it's Windows operating system which is growing and spreading into different markets, especially mobile technology. This is where both companies meet again in a hugely growing market of mobile phones and tablets, where Apple is still dominating the market-share end and the profit margins end. Their are many times more products where Microsoft and Google compete, such as Cloud Data, mobile applications, music sharing and sales, PCs, Email, social media, and many others and the list continues to grow.

Being the senior technology company, Microsoft has a bit of a different management style, especially when it comes to inner-company activities and development. Microsoft has a more traditional style of developing where tasks are generated and handed down from the top all the way down to the engineers who simply follow tasks. Of course, this is speaking generally because this sort of management style tends to change often within technology companies. Google, on the other hand, has a more hands-on approach when it comes to product development where engineers are given more freedom to develop and interact with many parts of the company, allowing creativity be given a bold place in it's product development process.

When it comes to public relations, it seems both companies are trying to mimic the public appeal of companies like Apple who has proven able to connect to its' customers, as it does with the Apple Store retails centers that provide constant face-to-face contact with customers. To mention, product presentations are handled very similarly as well. The CEO or COO of each company are typically the ones to demonstrate a new products in front of many thousands of enthusiasts and journalists while leaving the corporate suit at home.

6 In an article titled What Would Larry Page do?: Leadership Lessons from Google's Doyen, posted on the internet on CNN, the author Vickie Elmer discusses the leadership style of Google's former CEO, Larry Paige. The article provided good insight to what was mentioned above about the creative allowance differences between Google and Microsoft, as well as how the CEO is involved even at the bottom end of the company.

For years, Page insisted on being involved in every hire at Google. Many of his early hires were graduates of University of Michigan or Stanford University, where he and co-founder Sergey Brin met while in graduate school. While some have left to establish their own companies, many have stuck around because of his approach. Three of the six people recently promoted to lead Google's major product divisions are among the first 10 or so employees the company hired, dating back to 1998 (Elmer)

Elmer goes on to discuss how Google is continuously looking to cut or re-assign middle management to reduce a bureaucratic atmosphere.

When it comes to how well these two companies can withstand negative economic situations like the recent and ongoing recession, there are many factors that will come in to play. Both Microsoft and Google have a very diverse portfolio of products and investments. They each have a global outreach and many billions of dollars in resources that could allow them to make necessary changes in business strategy to reduce affects of such economic turns mentioned. Though they both managed themselves through the recession with minimal loss, compared to many others, they are certainly not bullet-proof.

Focusing just on each company's core products, Microsoft's dependency on their core product,

7 Windows, could prove Microsoft to be a more volatile a business because of the high retail prices of it's products that would be difficult to push during recession times. Although, Microsoft's strategy for selling Windows is greatly based on partnerships with manufacturers and doesn't rely too much on individual retail sales. Microsoft's $23 billion in liabilities will probably determine their ultimate ability to compete with Google's $9 billion in liabilities. Google would have much less liabilities to liquidate if it were forced to in major negative economic situations.

Profitability ratios will provide much of the necessary bits of information needed in order to make a proper investment decision into a company as it provides a lot of insight into the company's performance where you can examine quarterly ROI statement history where you could examine the stability of the ROI over time. For example, Google's Fixed Asset Turnover Ratio (FATR) was last reported at 4.4:1 while Microsoft's FATR was last reported at 9.0:1, showing that Microsoft is better able to continuously profit off of it's fixed assets. With Microsoft's first quarter ROA and ROE reporting much better returns than Google, a good short-term position with Microsoft will prove more profitable than with Google.

Long-term positions can be a very different cases. With Microsoft's high amounts of liabilities, making it more vulnerable to negative economic situations, Google is in a more manageable situation from an investment standpoint. Another indicator of this long-term option is the Price per Earnings ratio (P/E) which shows Google currently at 17.3:1 and Microsoft at 10.4:1. This means investors are willing to risk more with Google to earn the same amount as they would with Microsoft, an indication that confidence is much higher with Google. This could also be partially due to innovation positions Google holds over Microsoft and the market-share of Google's several products.

8 In an article titled The Future of Google Revealed, posted on the internet on techradar.com, on December 26, 2011, the author Gary Marshall discusses the biggest issues that Google carries, especially in regards to it's competition, as well as discuss the best thing Google has going for itself as a company. Although products like Android still are only making small profits, comparatively, the company is still innovating and pushing out products that people are using.

The key to Google's strategy is that it doesn't really have a formal strategy. As technology analysis firm Gartner explains, "Google encourages innovation through emergence. It doesn't have a strategic master plan with investors or clients, which for some is a source of confusion or frustration. Applications, services and products that succeed - whether in revenue generation or serving as irritants and disrupters to its rivals - receive more resources (Marshall)

Comparing Google and Microsoft isn't an easy task due to the similarities in styles and goals. When you break down the financial statements and balance sheets, you get a picture of how they differ to a professional stock trader. When it comes to products and innovation, they seem to rely on each other more than most understand and not only do they sometimes rely on each other, but they are beginning to rely more and more on other competitive technology companies like social media companies.

Works Cited: Elmer, Vickie. What Would Larry Page Do? Leadership Lessons from Google's Doyen. CNN Fortune. 18 April, 2011. Web. 29 May, 2012. Marshall, Gary. The Future of Google Revealed. Tech Radar. 26 December, 2011. Web. 29 May, 2012.

9 Reeves, Jeff. Dividend Failures: 6 Biggest Stocks Refusing to Reward Shareholders. Investor Place. 20 March, 2012. Web. 29 May, 2012.