MINOR PROJECT REPORT ON

COMPARITIVE FINANCIAL
ANALYSIS OF MICROSOFT AND
ALPHABET

SUBMITTED FOR PARTIAL FULFILLMENT OF THE

AWARD OF THE DEGREE
OF BACHELOR OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF

(FACULTY MENTOR NAME)
(DESIGNATION OF FACULTY MENTOR)

SUBMITTED TO SUBMITTED BY
Course incharge Archit Yadav
designation BBA VI
study hall college ROLLNO- 2112410980002
2021-24

STUDY HALL COLLEGE

UNIVERSITY OF LUCKNOW
 ABSTRACT
This study provides a comparison of two key players in the IT industry,
Microsoft and Alphabet, from a financial point of view. After analysing the IT
industry and introducing the main theoretical concepts of the paper, the study
gives a general overview of the two tech giants and compares their business
models focusing on how they create and capture value. Furthermore, the case
study includes a calculation of financial ratios using secondary data and
explains the effect of the Coronavirus pandemic on the companies’ financial
performance. Finally, their capital structure and their alleged anti-competitive
actions are discussed, outlining two court cases of great importance and their
consequences on stock prices.

Keywords: Microsoft, Alphabet, financial analysis, IT industry,

INDEX
1. INTRODUCTION............................................................................................................. 4

2. INDUSTRY DESCRIPTION AND ANALYSIS ............................................................ 5

2.1. Introduction to the information technology industry................................................... 5

2.2. Industry analysis using Porter’s 5 forces framework .................................................. 5

2.2.2. Bargaining power of suppliers ............................................................................. 7

2.2.3. Bargaining power of buyers................................................................................. 7

2.2.4. Threat of substitute products................................................................................ 7

2.2.5. Rivalry among competing firms........................................................................... 8

3. HOW TO DEFINE BUSINESS MODELS?................................................................... 9

3.1. Why firms fail to design successful business models?................................................ 9

3.2. Differences between business models, strategy and tactics....................................... 10

3.3. Digital Business Models............................................................................................ 11

3.4. Hybrid business models............................................................................................. 11

3.5. Monopolistic Behaviwe ............................................................................................ 12

4. OPTIMAL CAPITAL STRUCTURE........................................................................... 14

4.1. Trade-off theory......................................................................................................... 14

4.2. Pecking order theory.................................................................................................. 15

5. METHODOLOGY ......................................................................................................... 16

5.1. Secondary data collection – Financial statements..................................................... 16

5.2. Horizontal Analysis................................................................................................... 17

5.3. Vertical Analysis ....................................................................................................... 17

6. THE CASE STUDY – MICROSOFT VERSUS ALPHABET.................................... 18

6.1. Company overview - Alphabet...................................................................................... 18

6.2. Company overview - Microsoft..................................................................................... 19

6.3. Comparison of Business models................................................................................ 20

6.3.1. Hybrid Business Model...................................................................................... 20

6.3.2. Capturing value .................................................................................................. 23

6.3.3. Differences in value creation ............................................................................. 24

7. FINANCIAL RATIO ANALYSIS................................................................................. 26

7.1. Liquidity Ratios............................................................................................................. 26

7.1.2. Why companies in the technology industry are holding so much cash? ................ 27
7.2. Solvency Ratios............................................................................................................. 28

8. EFFECT OF THE CORONAVIRUS PANDEMIC ON FINANCIAL HEALTH.... 30

9. COMPARISON OF CAPITAL STRUCTURE............................................................ 32

9.1. Microsoft’s approach to debt financing......................................................................... 32

9.2. Alphabet’s approach to debt financing.......................................................................... 33

10. ANTI-COMPETITIVE BEHAVITHEY......................................................................... 35

10.1. United States v. Microsoft........................................................................................... 35

10.2. United States v. Alphabet – Google Play Monopoly................................................... 36

10.3 Stock price evolution ................................................................................................... 38

10.4. Stock price reaction to lawsuits................................................................................... 40

11. CONCLUSION ............................................................................................................... 42

INTRODUCTION
Alphabet, formerly known as Google, entered the information technology (IT) industry in 1998 with
its incredibly innovative search engine and ruled the market for many years, while the now justly
famous Microsoft was only in its infancy. Between 1998 and 2004, when the firm went public, the
value of Microsoft’s stock was not even close to Google’s which was at $80 billion. At that time, no
one would have thought that Microsoft will be one of the most threatening competitors of Alphabet.
Microsoft’s primary focus was a PC operating system and other software solutions that were unrelated
to Google’s main activity. The question arises, where is the conflict of interest? What has happened in
recent years and why these two giants are racing constantly neck to neck for market share?

Although not from the very beginning, and not even in the main product lines, one could
still say that the rivalry started a long time ago. The first case that comes to mind is the battle for mail
and instant messaging services, starting from 2012. Hotmail and Gmail were the two most widely
used applications, and the rivalry has not abated. To remain competitive, Hotmail was restructured
and renamed as Outlook, making it a more sophisticated mail service provider that is capable of
fighting back. Gmail is still the market leader with its popular design and user friendly interface;
however, Outlook is often preferred in B2B purchases. Furthermore, Alphabet decided to compete
with the Microsoft office applications, a move that only a few expected. They created an innovative
web-based software, which is called Google Docs. Users can reach all the same features of the office
applications (PowerPoint, Word, Excel etc.), but without the need of downloading anything. The
program provides access to the documents from every part of the world, making it faster and easier to
work with. These examples explain that in this never-ending race, Microsoft and Alphabet are
continuously having conflicting interests and have become direct competitors in many areas. The
competition is heating up on several fronts, but both sides remain powerful, and it appears that the
situation will be the same in the coming years.

The intense rivalry and the strength of these tech giants are the two main reasons why an
analysis and financial comparison of the two players could lead to valuable findings. Analysing the
financial statements of Alphabet and Microsoft led to a better understanding of their financial position
and their ability to tackle the consequences of a world crisis caused by the Coronavirus pandemic. The
paper describes the capital structure of companies and explores the literature written in the topic. The
objective of the financial analysis is not just to analyse the numbers, but to identify the key
differences
in their capital structure and their approach to debt financing. Furthermore, the case study sheds light
on the dissimilarities of the two companies’ business models and digs into the most influential
antitrust lawsuits that the companies face for allegedly abusing monopoly power. This is in line with
the 8th United Nation Development Goal of decent work and economic growth focusing on sound
economic policies, solid democratic institutions responsive to the needs of the people.

OBJECTIVE OF THE COMPARATIVE FINANCIAL ANALYSIS

Investment Decision Making:
 To assess which company is a more attractive investment opportunity based on factors like
profitability, growth potential, and risk.
 To compare valuation metrics like P/E ratio and book value to determine if either stock is
over or undervalued relative to the other.

Industry Benchmarking:
 To understand how each company performs financially within the technology sector.
 To identify strengths and weaknesses of each company's financial performance compared to
its major competitor.

Strategic Analysis:
 To gain insights into each company's business model and how they generate revenue and
profits.
 To compare their product portfolios, market share, and geographic reach to identify areas of
competitive advantage.

Overall Financial Health:

 To assess the liquidity, solvency, and profitability of each company.
 To compare their debt levels, cash flow generation, and efficiency in using resources.
 By comparing the financial performance of Alphabet and Microsoft, investors and analysts
can make more informed decisions about these leading technology companies.

COMPANY OVERVIEW (MICROSOFT)

Microsoft was founded in 1975. Their mission is to enable people and businesses throughout the
world to realize their full potential by creating technology that transforms the way people work, play,
and communicate. We develop and market software, services, and hardware devices that deliver new
opportunities, greater convenience, and enhanced value to people's lives. We do business worldwide
and have offices in more than 100 countries.

They generate revenue by developing, licensing, and supporting a wide range of software products
and services, by designing and selling hardware devices, and by delivering relevant online advertising
to a global customer audience. In addition to selling individual products and services, we offer suites
of products and services.

They products include operating systems for computing devices, servers, phones, and other intelligent
devices; server applications for distributed computing environments; productivity applications;
business solution applications; desktop and server management tools; software development tools;
video games; and online advertising. We also design and sell hardware devices including surface rt
and surface pro, the Xbox 360 gaming and entertainment console, Kinect for Xbox 360, Xbox 360
accessories, and Microsoft pc accessories.

We offer cloud-based solutions that provide customers with software, services, and content over the
internet by way of shared computing resources located in centralized Data Centers. Examples of
cloud-based computing services we offer include Microsoft office 365, Microsoft dynamics CRM
online, windows azure, Bing, skype, Xbox live, and yammer. Cloud revenue is earned primarily from
usage fees, advertising, and subscriptions. We also provide consulting and product and solution
support services, and we train and certify computer system integrators and developers.

We conduct research and develop advanced technologies for future software, hardware, and services.
We believe that we will continue to grow and meet they customers' needs by delivering a family of
devices and services for individuals and businesses that empower people around the globe at home, at
work, and on the go, for the activities they value most. We will continue to create new opportunities
for partners, increase customer satisfaction, and improve they service excellence, business efficacy,
and internal processes.

COMPANY OVERVIEW (ALPHABET)

On august 10, 2015, google announced plans to create a new public holding company, alphabet inc.
Google co-founder and CEO Larry Page made this announcement in a blog post on Google's official
blog. Alphabet was created to restructure google by moving subsidiaries from google to alphabet, thus
narrowing Google's scope. The new holding company would consist of google as well as other
businesses including X Development, Calico, Nest, Verily, Fiber, Makani, Capital g, and GV. Sundar
Pichai, the company's product chief, became the new chief executive officer of google, replacing
page, who transitioned to the role of running alphabet, along with co-founder Sergey brin.
In his announcement, page stated that the planned holding company would allow for "more
management scale, as we can run things independently that aren't very related" to google. He clarified
that, as a result of the new holding company, google would be "a bit slimmed down, with the
companies that are pretty far afield of our main internet products contained in alphabet instead". He
further stated that the motivation behind the reorganization is to make google "cleaner and more
accountable and better" and that that he wanted to improve "the transparency and oversight of what
we're doing".
Former executive Eric Schmidt (now technical advisor) revealed in the conference in 2017 the
inspiration for this structure came from Warren Buffett and his management structure of Berkshire
Hathaway a decade ago. Schmidt said he encouraged page and brin to meet with Buffett in Omaha to
see how Berkshire Hathaway was a holding company made of subsidiaries with strong CEOs who
were trusted to run their businesses.
Before it became a subsidiary of alphabet, google inc. was first structured as the owner of alphabet.
The roles were reversed after a placeholder subsidiary was created for the ownership of alphabet, at
which point the newly formed subsidiary was merged with google. Google's stock was then converted
to alphabet's stock. Under the Delaware General Corporation Law (where alphabet is incorporated), a
holding company reorganization such as this can be done without a vote of shareholders, as this
reorganization was. The restructuring process was completed on October 2, 2015. Alphabet retains
google inc.'s stock price history and continues to trade under google inc.'s former ticker symbols
"GOOG" and "GOOGL"; both classes of stock are components of major stock market indices such as
the S&P 500 and Nasdaq-100.
On December 3, 2019, page and brin jointly announced that they would step down from their
respective roles, remaining as employees and still the majority vote on the board of directors. Sundar
Pichai, the CEO of google, assumed the CEO role at alphabet while retaining the same at google. The
firm completed a stock split in mid-2022.
On January 20, 2023, Pichai wrote a letter to all employees announcing that the company would
be laying off about 12,000 jobs, or 6% of its global workforce. In the letter, Pichai wrote, "over the
past two years we’ve seen periods of dramatic growth. To match and fuel that growth, we hired for a
different economic reality than the one we face today."
In January 2024, Waymo, the autonomous driving division of alphabet inc., which operates
extensively in San Francisco, filed an application with the California public utilities commission to
expand service in Los Angeles. Such a license would allow the company to make full use of its fleet
in the city instead of test drives by invitation.