Is This Software Giant Primed for a Mighty Fall?

This past weekend, the Motley Fool Money radio show featured best-selling author Jim Collins. Knowing that he was going to be a guest, I went to my bookshelf and dusted off a copy of one of my favorite Collins books: How the Mighty Fall.

The book details the five stages of decline that once-great companies go through during their fall from grace. Yesterday, I detailed Stage One: hubris born of success. Today's we'll be dealing with the second stage, and the company in our crosshairs is Microsoft (NAS: MSFT) .

Stage 2: the undisciplined pursuit of more.
At the end of each chapter, Collins quickly summarizes the key symptoms to diagnose whether a company is in a certain stage of decline. Instead of listing all the symptoms, I'm going to zero in on the one that Microsoft is most guilty of. A quick look will show why investors might be worried about Microsoft.

Symptom: an unsustainable quest for growth, confusing "big" with "great"
Let's look at some of the many questionable acquisitions Microsoft has made during the Steve Ballmer era, in order of their price tags.

2008: Greenfield Online, $486 million
Microsoft originally purchased this European outfit for access to its price-comparison and shopping site, Ciao. The website is still up and running, but it doesn't seem to have been a very good investment: Reports earlier this year indicated that Ciao was up for sale. The asking price: under $100 million. That's a pretty terrible return on an investment.

2008: Danger, $500 million
Ballmer engineered this deal in an effort to combat the head start that competitors such as Apple (NAS: AAPL) and Google already had in mobile. Danger engineers were put to work on the Kin phone, which lasted a whole two months on the market before being scrapped.

2008: FAST Search & Transfer, $1.2 billion
Microsoft acquired this enterprise-search solution company for a 42% premium. Just 10 months later, authorities, on charges of accounting fraud, were raiding FAST's headquarters.

2007: aQuantive, $6.6 billion
When this former Rule Breakers pick, a digital advertising agency, was bought out in 2007, our own Tim Beyers was a big fan of the deal. Microsoft was moving fast to keep the company out of rival Yahoo!'s (NAS: YHOO) hands, which is ironic since Microsoft almost bought out Yahoo! a short time later. Alas, aQuantive's CEO left in 2008, much of what was acquired was discarded when Microsoft chose to focus on Bing for its advertising dollars, and a significant portion of aQuantive (digital ad agency Avenue A) was sold off for just $530 million.

2011: Skype, $8.5 billion
This really got investors riled. For starters, this isn't the only company offering this kind of online communication platform. It may be the most recognizable brand, but Google, Apple, Vonage (NYS: VG) , and Cisco (NAS: CSCO) all offer similar products.

But in truth, it's still too early to tell just how good or bad this decision was. There is one thing most pundits agree on: Microsoft paid way too much for Skype.

Putting things in context
Maybe I'm not totally being fair here. Microsoft's Windows and Office Suite have been dominant forces since before I was even in college. Just yesterday, my wife bought a new Apple; when Apple offered to install the iWork suite, she turned it down in favor of the more expensive Office Suite. Those products are ubiquitous, and there's a huge moat surrounding them.

I also give the company credit for scoring a great deal with Baidu (NAS: BIDU) , as it now powers English language searches from the Chinese giant.

In the end, however, Stage 2 can last a long time; Microsoft's death march could be a long and protracted one, especially if it keeps grasping at acquisitions to drive future growth.

If you share a bearish sentiment on Microsoft, I suggest you take a look at The Motley Fool's special free report: "Two Words Bill Gates Doesn't Want You To Hear." Inside, you'll be able to watch a video that outlines how we'll all be connected electronically years from now, and the companies that will help bring us there. The report is yours today, absolutely free!

At the time thisarticle was published Fool contributorBrian Stoffelowns shares of Google and Apple, but certainly not Microsoft. You can follow him on Twitter at@TMFStoffel.The Motley Fool owns shares of Google, Cisco Systems, Apple, Yahoo!, and Microsoft.Motley Fool newsletter serviceshave recommended buying shares of Cisco Systems, Microsoft, Apple, Google, Yahoo!, and Baidu, as well as creating bull call spreads position in Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.