Chris Liddell

Microsoft’s large cash pile positions the Redmond company to use the economic downturn as a buying opportunity — potentially acquiring smaller companies at much lower prices than their owners might have sought last year. But for now, the company is biding its time.

Chris Liddell, Microsoft’s chief financial officer, told financial analysts in January that Microsoft wouldn’t be particularly active in mergers and acquisitions during the second half of its fiscal year, which ends in June. However, after that, Microsoft expects “very good” opportunities to make small- and medium-sized deals.

The reason, Liddell said, is that many companies haven’t yet lowered their own perceptions of their financial value to match the new economic reality. But as the situation becomes more clear, Microsoft expects the prices to drop.

Microsoft generally targets acquisitions below $1 billion, and those “are tougher because people just don’t know how to value their businesses today,” Microsoft CEO Steve Ballmer said during the company’s Jan. 22 conference call.

During a more recent discussion with analysts, on Feb. 24, Liddell gave a somewhat longer time frame for the lull in deal-making. "It's likely to be a relatively slow period for the next, let's just say, 12 months for the sake of discussion, simply because (companies) haven't already set their expectations around current values versus what they would wished for a year ago," he said.

The company had more than $20 billion in cash and short-term investments as of Dec. 31 -- considerably less than in years past, but still enough to make sizable deals.

Even though Microsoft didn’t complete its proposed Yahoo acquisition, the company has been on a buying spree in recent years. Its 2008 fiscal year, ended June 30, was a company record — thanks to the $6 billion purchase of Seattle interactive marketing company aQuantive and the $1.2 billion purchase of Norway’s Fast Search & Transfer.

In addition to those deals, the company bought 19 other companies last year, for an aggregate sum of $1.6 billion, primarily cash, according to its regulatory filings. Those included the purchase of Danger Inc., the company behind T-Mobile’s Sidekick device.

The Danger deal reflects Microsoft’s efforts to keep pace with -— and in some cases catch up to -— its rivals in mobile phone software and services. That’s likely to be one major area of focus as Microsoft starts making more acquisitions again, said industry analyst Michael Gartenberg, vice president of strategy and analysis at Interpret LLC in New York.

“This is the time when you start taking a look and seeing what makes sense in terms of acquisitions,” because of the dropping valuations, Gartenberg said.

Microsoft recently unveiled an upgraded version of its Windows Mobile software with more features for touch-screen phones, a market that Apple’s iPhone has largely defined. The company also has been shifting executives and engineers into its mobile communications business from other Microsoft divisions.

So it wouldn’t be a surprise to see Microsoft make more deals in the mobile area.

Media and entertainment is another area where the company could be looking to make selective acquisitions, Gartenberg said. Along those lines, a recent report on the website Haaretz.com said Microsoft was in talks to buy Israeli startup 3DV Systems, which makes cameras that detect motion and can be used to control video games.

Microsoft’s Xbox 360 would be one likely application of the technology, the site said. The report cited a potential purchase price of $35 million — about $3.5 million less than the sum of venture capital invested in the company. If that turns out to be right, the deal would exemplify the lower prices for which Liddell said Microsoft was waiting.

A Microsoft spokesman declined to comment on the reported talks.