Deal of the century? How Microsoft beat Apple to buy PowerPoint for $14 million

This is part one of a series of stories from Robert Gaskins who helped invent PowerPoint at Forethought Inc. in 1984. It was the first significant acquisition made by Microsoft. We interviewed Robert about the process of building a startup in the 1980s and what life was like negotiating with, and working for Microsoft. After the sale Robert reported directly to Bill Gates, heading up Microsoft’s business unit in Silicon Valley. He managed the growth of PowerPoint to $100 million in annual sales before his retirement in 1993.

This post looks at the negotiation process between Forethought Inc and Microsoft – why it came about, how Apple missed out, and the eventual closing of the deal which netted Forethought $14 million in cash.

Robert picks up the story …

The First Offer

“We did our launch event for PowerPoint on 22 February 1987, two months before our planned ship date. Five days later, we got a completely unexpected Microsoft offer for PowerPoint.

Bill Gates told us that Microsoft would definitely be in the presentation market one way or another, and wanted PowerPoint as the best product.

He wanted to do an acquisition of our product for cash, immediately. Developers would stay in Sunnyvale and work remotely, at least initially; all other functions would be handled in Redmond.

Three weeks later, 13 March 1987, we had dinner in Silicon Valley with Jon Shirley (the President of Microsoft) and Jeff Raikes (head of Applications marketing). They repeated a similar offer, with more details. They told us they were working on a business plan to develop a presentation product internally, and already had people assigned to it; but they wanted to accelerate their work by acquiring a product.

They offered $5.3 million to the investors, plus incentives to the developers. They were interested only in PowerPoint; they said that they expected that our [Forethought Inc] other big product, FileMaker Plus for Mac, would not be popular on Windows.

This offer seemed a positive vote of confidence in PowerPoint, but the rest of the terms weren’t so attractive; the amount of money offered would not have provided much return for our investors. Also, we had received two other serious offers of acquisition in the preceding week.

Shipping PowerPoint & Offer #2

We decided to sit tight and ship PowerPoint before taking any other step. Other possibilities were swirling around. A potential underwriter for our doing an IPO, Baer & Co., had scheduled a meeting with us. The final details of the PowerPoint software continued to come together on schedule, thanks to calmly heroic efforts by Dennis Austin (head of software design and development for PowerPoint) and Tom Rudkin (headed up the work on a future Windows version of what was being designed and implemented first for Macintosh), who were doing the development.

After that we continued to get a trickle of offers from Microsoft, usually each one better than the last, but with a changing profile of complications from one offer to the next. There was clearly some improvisation going on.

On Tuesday 28 April 1987, just about a week after shipping, we spent a whole day entertaining a Microsoft delegation at Forethought. There was a discussion about the acquisition structure. The Microsoft group had thought about it a lot more than we had and suggested three models:

1. A “development center” – just developers working remotely and visiting Redmond often to liaise.
2. A “product center” – with program management doing product specification, plus development, documentation, and testing
3. A “business center” – an independent business unit.

Their preference was (2), a product center, with marketing and everything else consolidated in Redmond. In any of the three choices, the developers would remain in Silicon Valley.

On 13 May 1987, after time for legal review, Microsoft faxed us a formal letter of intent.

The amount of this offer was 100,000 shares of MSFT stock, worth about $12 million at the time.

Microsoft stock was 6x since the IPO a year earlier. That was more than twice the amount offered on the 13th of March, two months earlier (pre-shipping), so we’d made progress in raising the price.

Some of the details in the letter of intent were surprising. Unlike the discussion we had just held at Forethought, the entire business now was to be completely relocated to Redmond, including development, with nothing left in California. Key personnel, to be named (but certainly including all the senior developers and me), would be required to agree to relocate to Redmond as a condition of the deal.

Also, there was a command performance: “An essential part of the technical and due diligence investigation will be Bill Gates’ meeting with Bob Gaskins of Forethought during the week of May 18 or as soon thereafter as possible … .”

I was the only person named in the letter of intent as requiring such vetting.

Multiple Offers – Apple, Borland & Xerox

We held our Annual Meeting of the Forethought Board of Directors on 10 June 1987. We discussed all the acquisition offers. First was Microsoft. I had previously prepared a written recommendation to the Board that we should pursue the acquisition by Microsoft. At the same meeting we considered acquisition offers from Apple (no offer finalized), Ansa (to merge for an IPO in the fall, to be done by Alex. Brown at a $75 million value), a “firm” offer from Borland to acquire Forethought for $18 million in cash, with action absolutely guaranteed within the week (never happened), and an immensely complex offer from Xerox (after hours of negotiations) for exclusive sales rights to PowerPoint, for which they would pay something above $18 million. The meeting ended with a summary of the agreed directions to management: “Our real agenda is to get a clean, high offer from Microsoft.”

And on Microsoft, the specific direction was: contact Microsoft immediately and see if it were possible to get a deal which was higher in value and with fewer complications. If so, accept it. If not, then get in touch with Dave Marquardt (the venture capital investor who served on Microsoft’s board) and connect him to our VC investors to continue negotiations.

The call to Microsoft resulted in a further offer which was different, but not one which was cleaner. Now the offer was to make us a “product/marketing center,” which would include development and limited marketing in Silicon Valley, for a total of 15–20 people. All else, including again all sales, would be in Redmond. The price was upped to a maximum of $15 million, but computed as a $9 million base plus a “royalty” of $75 per unit of Mac product shipped for eight months, and further bonuses for releasing Windows and OS/2 versions by agreed dates. The new offer, however, was for cash rather than MSFT stock, overcoming one hesitation of our investors.

The prospect of remaining in Silicon Valley was good, but the new idea of “royalties” seemed unnecessarily complex.

We moved on to the plan of trying to make progress through negotiations between the VCs for the two companies – Phil Lamoreaux met Dave Marquardt. His pitch was that the VCs who had invested in Forethought were interested to conclude the Microsoft offer and were able to make it happen, but (1) the offer was a little light and (2) the structure could be improved. The aim was closure, fairly quickly.

Marquardt  volunteered that it was a “make vs. buy” decision for Microsoft, and they had concluded that they had to buy. They had looked at three companies, and we were the only ones left on their list, so they were also motivated to close. Marquardt would ask Jon Shirley the following day, 22 June 1987, to get involved and try to get closure within a week.

Closing the Deal with Microsoft

And three days later, Thursday, 25 June 1987, about 11:30 a.m., we got the word: Microsoft had agreed to a very clean deal, at a price of $14 million in cash. Jon Shirley said that he considered the acquisition a firm deal, subject to due diligence in the areas of accounting, legal, and technical. Contrary to previous offers, we were to be a permanent installation in California, and we would be a “Business Unit,” the first such group in the Apps Division, comparable to a few similar, self-contained organizations that already existed in the Systems Division.

As part of the Applications Division, we would report to Bill Gates as Acting VP of Applications. The transaction would be for a flat $14 million in cash, plus possibly some incentives to be defined for our employees joining Microsoft. Everyone at Forethought who would not be part of the PowerPoint Business Unit would be offered a suitable job with Microsoft in Redmond or in local field offices, or outplaced with severance, and Microsoft wanted to “go the extra mile” to be sure everyone was treated well.

We had the internal announcement at Forethought on Thursday, 9 July 1987, at 3:00 p.m. Jon Shirley and Jeff Raikes came down to be there in person. It impressed me that Jon was willing to go to so much trouble to make a brief appearance before all our people.

Joining the Microsoft family

I had dealt with Jon Shirley fairly often in the past, going back to 1983, and had always been particularly impressed by his intelligence and plain speaking. His talk on this occasion was simple and convincing, nothing canned or pompous, and very thoughtfully aimed at precisely the concerns of the Forethought people who were hearing about this, as a fact rather than a rumour, for the first time.

Jon began by saying that this was the “first major acquisition by Microsoft.” What they were looking for were great products, great people, and complementary visions, and Forethought met all three criteria.

He went on to say that PowerPoint was “not only great, but [was] a pioneering product— a major new category, a leadership product.” (I did think how much easier the preceding three years would have been if I had had that quote available to use at the beginning of the project.)

Jon said a lot of things that reassured even me. Microsoft wanted to build up a real team, here, to do graphics products. The location in Silicon Valley was important to them; not all the best people in the world could be hired in Redmond. It would be important for Microsoft to have other development centers in other locations, and this was the first. A year from now, there would be more people in the GBU than were in all of Forethought at the acquisition; within a year, we would need to move to a larger building in our area. (This specific detail confirmed to me that the “permanent unit” plan was true.)

The major assets of Microsoft were people, and the aim was to place all of Forethought’s people within Microsoft; they had “never laid off a person at Microsoft.”

Jeff Raikes stressed that we would be first-class citizens of Microsoft, even though residing in a distant part of the empire, with all the same advantages as people in Redmond: private enclosed offices for everyone, worldwide email access (a rare perquisite in 1987), all the lavish company benefits, and we would all attend the next company meeting in Seattle in October (this was true, and most impressive).

Right product, right place, right time

So, we had been fortunate to launch our PowerPoint product just at the same moment that Microsoft had become convinced that they needed essentially the same product, and when they were looking for an acquisition to substitute for their initial internal development plans. Bill’s initial thoughts on price (prior to our ship) had been about $5 million in MSFT stock, but after a very successful ship (we sold out our entire initial manufacturing run on the first day) and glowing reviews, we managed to get a valuation of three times that much (and in cash) which made the deal attractive to our long-term VC investors.

The best feature of the outcome was the comparative autonomy of the group in the first five years following the acquisition by Microsoft. Because we had been a fully functioning stand-alone company for a long time, and had more than one shipping product, it had seemed plausible (and to us seemed an achievable negotiating position) to make us the first “Business Unit” within Microsoft’s Applications Division, and to allow us to continue independently. If we had been mostly just a handful of developers, it might have been a non-negotiable and obvious move to just insert us into some existing organization in Redmond.

It was our gaining five more years of real independence, with all the clout and resources of Microsoft at our backs, that enabled us to equip PowerPoint for long-term success even beyond its original uses.

I had recommended no conditions on a deal, but I had privately hoped we could end up staying in Silicon Valley rather than moving to Redmond. To be part of Microsoft would be bliss, but to be part of Microsoft and yet be able to stay in San Francisco would be very heaven.

If we could avoid forced relocation, things would be perfect. Somehow, it worked out. I used to joke, afterward, that the whole dramatic struggle of Forethought and the whole acquisition had been merely an elaborate scheme that I used in order to get a job with Microsoft without having to move to Seattle.”

This is the first in a series of stories from our interview with Robert Gaskins. Other posts will cover:

• Running a startup in the 1980’s
• What it was like working directly for Bill Gates at Microsoft

Image credits: All images are sourced from Robert Gaskin’s excellent website covering the history of PowerPoint. His book “Sweating Bullets” remains the definitive read on that topic.