Microsoft Can Unlock Value By Acquiring Dropbox If It Pays Less Than $17 Billion

Dropbox recently filed for an IPO with the intent to raise $500 million over the coming months. However, it’s possible that the company will get acquired before it actually goes public, as it is a strong acquisition candidate for any company that wants to improve its presence in the cloud storage / digital collaboration space.

While the list of potential suitors for Dropbox is long, two companies that could benefit the most from acquiring Dropbox are Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL). In this note, we highlight the key reasons why Microsoft would be keen to acquire Dropbox, and use our interactive model to estimate the maximum amount the tech giant could offer to close a potential deal at a reasonable price.

Why Microsoft Is Likely To Make A Play For Dropbox

In recent years, Microsoft has focused considerably on improved collaborative functionality for Microsoft Office to ward off Google’s attempt to dominate in this segment through its G Suite offerings. While Microsoft Office remained largely unrivaled for decades, its limited scope in terms of collaborative use was highlighted by Google’s offerings which focused largely on this aspect. While Microsoft has addressed these shortcomings over the years through Office 365, the company is still well behind Google in terms of adoption of its cloud storage feature OneDrive (vs. Google Drive). As cloud storage forms an integral part of collaborative productivity software, acquiring Dropbox could level this playing field for Microsoft.

Additionally, Microsoft views its cloud computing service, Azure, as its single biggest avenue for growth in the long run. And the Azure platform would benefit from the integration of Dropbox’s easy-to-use enterprise solution – Dropbox Business – to its existing offering, OneDrive for Business. As Dropbox fits naturally into two of Microsoft’s core business segments, an acquisition certainly seems logical.

So How Much Should Microsoft Pay For Dropbox?

We believe that Microsoft could profitably acquire Dropbox for as much as $17 billion. This figure represents a premium of about 70% over our estimated value of $10 billion for the company.

We arrive at Microsoft’s maximum acquisition value for Dropbox in three simple steps:

• Step 1: To begin with, we estimate the increase in Microsoft’s revenues for 2018 if it integrates Dropbox. The incremental revenues include our estimated revenues for Dropbox this year, as well as additional gains from revenue synergies that Microsoft could realize. These gains would be achieved by incrementally higher revenues for Microsoft from its Productivity and Cloud Computing segments.

• Step 2: We then arrive at our estimate for Microsoft’s incremental EBITDA gains using an EBITDA margin of 50% for the incremental revenues calculated in Step 1. Historically, the EBITDA margin for Microsoft’s productivity and cloud computing segments have been between 45-50%.

• Step 3: Finally, we use Microsoft’s current EV/EBITDA multiple of 20x to determine the incremental value added by Dropbox’s acquisition. This is essentially the maximum Microsoft could be willing to pay to acquire Dropbox.

As shown above, Microsoft could be creating value for its shareholders as long as it can successfully acquire and integrate Dropbox by spending less than $17 billion. If you disagree, however, you can arrive at your own estimate for the acquisition price by making changes on our dashboard.

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