January 10, 2008 11:21 pm

Logitech/Microsoft: antitrust and strategic obstacles make for difficult bid prospects

This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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A Microsoft bid for Logitech would be hard to justify for both competition and strategy reasons, a source familiar and several independent lawyers told mergermarket.

Shares in the Switzerland-listed Logitech increased 6.1% today (Thursday) to CHF 38.380 (EUR 23.46) on market rumours that Microsoft could launch a bid. Logitech’s shares are valued at around CHF 7bn (EUR 4.2bn).

A source familiar with the situation referred to comments made earlier today (Thursday) by Logitech’s largest shareholder and board member Daniel Borel, who said that he was unwilling to sell his 6% stake. The source said that Borel would not make such a statement if he was in talks with Microsoft or another interested party. The source added that there could not be a friendly deal without Borel and that Microsoft going hostile on Logitech seemed an unlikely prospect.

It was revealed yesterday that Bruce Jaffe, Microsoft’s chief deal-maker, will leave the company at the end of February. However, analysts do not expect his departure to have an impact on Microsoft’s M&A strategy.

Other factors making a deal between Microsoft and Logitech difficult would be antitrust obstacles. Even if horizontal problems posed by a merger of the number one and the number two PC peripherals manufacturers would not be enough for authorities like the EC to block the deal, vertical issues would be a serious concern, several independent lawyers have said.

One lawyer said that at first glance a Microsoft/Logitech deal would raise issues, as both were such prominent players in the market for PC peripherals. The source concurred that antitrust issues would arise from the fact that Microsoft and Logitech are the two biggest mice manufacturers.

According to a spokesperson for Logitech, in terms of units sold, Logitech has a 30-35% market share in mice, 25-30% in keyboards, 40-50% in webcams, its next biggest competitor being Microsoft.

Although unaware of Microsoft’s size as a hardware manufacturer, a second lawyer cautioned that it would be an obvious horizontal concern if Microsoft were to play a major role in hardware. With Microsoft being a strong player in computer operating systems (OS) with its Windows product family, the lawyer said, the question to ask was what would happen if the leader in OS also gained a strong position in a hardware segment, such as PC mice.

The first lawyer said that to assess potential vertical issues, regulatory authorities would examine if it was possible for the merged entity to make life more difficult for competitors in the hardware market, and if there was an incentive to do so.

However, a US based competition lawyer remained more cautious. He said that if Microsoft really had such an interest, they could have acted accordingly in the past already, since they were a hardware manufacturer already. He said that if Microsoft was really to make a move on Logitech, he did not see any serious problems, at least not in the US.

Finally, it was asked whether the strategic fit between Microsoft and Logitech was significant enough.

A Switzerland-based analyst referred to Logitech’s unique focuses on computer peripherals and its good position in the wireless digital entertainment trend, saying that Microsoft could benefit from Logitech’s good position on the “digital entertainment for the home” market.

As far as the PC and peripherals area is concerned, Logitech is clearly an interesting takeover target for Microsoft, said a Cherry insider, Logitech’s main competitor in Germany in the field of computer keyboards and mice. ”After all, Logitech is the market leader in this field,” said the insider.

A US-based sector banker concurred that the ’consumer media PC in the living room’ side of things was probably the only place where this deal could work. But the source doubted that Logitech could be a strategic priority for Microsoft, adding that Logitech was unproved in the home entertainment market and that it would have to be treated as a semi-autonomous company and more of an investment for Microsoft, making a deal unlikely.

The source added that Dutch electronics group Philips was probably a more interesting strategic match for Logitech, especially given its current focus on healthcare. However Logitech was probably too large for Philips. Logitech’s accessory peripherals have 15% to 20% operating margins and Philips has the distribution and retail network, this source argued.

The US-based sector banker said that the current rumour could be linked to Microsoft’s tendency to be aggressive and overpay for assets in an attempt to close the gap with outperforming players such as Apple.

Shares in Logitech increased 6.1% today (Thursday) to CHF 38.380 on market rumours that Microsoft could launch a bid.

Both Microsoft and Logitech declined comment.

Additional reporting by Mariana Valle and Tareq Al-Arab

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