Don Dodge on The Next Big Thing: "Microsoft will acquire my company": "How does Microsoft decide to acquire rather than build internally? This is the toughest question in any acquisition discussion. Microsoft has thousands of very talented software engineers that can build just about anything. How can you justify paying hundreds of millions or even billions for something a team of 50 engineers could build in a year or two. That translates to about $20M of development cost versus a huge acquisition cost. Technology is not the issue here. It is all about marketing channels, sales expertise, and market leadership in segments where Microsoft is not strong.
It comes down to this; if the company in question has a product that is squarely in the domain of an existing Microsoft product than the valuation is some multiple of the internal development cost. If the company has market leadership in a new product space or market segment than the valuation goes up significantly."
Also includes handy list of MS deals through mid-2003.