the equity of software, entertainment, and Internet-related
firms. It did so for several reasons.
29 First,itgaveMicrosoftasayintheproductsandservices
thesefirmsweredevelopingandpreemptedcompetitorsfrom
forming partnerships with the firms. Second, it allowed
Microsofttoworkonjointproductswiththesefirms.In 1998
alone, Microsoft announced investments in 14 firms,
including ShareWave, General Magic, RoadRunner, and
Qwest Communications. In an earlierinvestment in 1995,
MicrosoftinvestedinNBCtocreatetheMSNBCnetworkto
give it a foothold in the television and entertainment business.
Can strategicinvestments bevalue enhancing?As with all
investments,itdependsuponhowmuchisinvestedandwhat
thefirmreceivesasbenefitsinreturn.Ifthesidebenefitsand
synergiesthataretoutedintheseinvestmentsexist,investing
intheequityofotherfirmscanearnmuchhigherreturnsthan
thehurdlerateandcreatevalue.Itisclearlyamuchcheaper
option than acquiring the entire firm.
Business Investments
Some firms hold marketable securitiesnot as discretionary
investments,butbecauseofthenatureoftheirbusiness.For
instance, insurance companies and banks often invest in
marketable securities in the course of their business, the
formertocoverexpectedliabilitiesoninsuranceclaimsand
the latter in the course of trading. While these financial
servicesfirms havefinancialassets ofsubstantial value on
their balancesheets, theseholdings arenot comparable to
thoseofthefirmsdescribedsofarinthischapter.Infact,they
are moreakin to the raw material used by manufacturing
firms than to discretionary financial investments.