Microsoft to Wall Street: 'What, Me Worry?'
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News Commentary. From the debris of America's worsening financial crisis, Microsoft rises up and tells people why they should invest in its shares and technology. |
It's a bold and rather audacious strategy that just might work. Today, Microsoft made three seemingly separate announcements. But they are intimately connected:
- $40 billion stock repurchase program
- 13-cents-a-share quarterly dividend
- Launch of Windows HPC Server 2008 on Wall Street
In some ways, the $40 billion share buyback is a metaphor for buying back investors and, along with the server announcement, customers.
Additionally, in a move nearly unthinkable under the leadership of fiscally conservative Chairman Bill Gates, Microsoft will take on as much as $6 billion in debt. I guess the company will show its solidarity with America and the majority of its customers by joining them in debt. My question to Microsoft CEO Steve Ballmer: Did you get a good interest rate?
The $40 billion stock buyback and quarterly dividend are part of an ongoing program. Microsoft's stock price hasn't moved much since around 2000, mostly hanging below $30 a share. The stock repurchases and dividends are ways Microsoft returns investment to shareholders, even with the share price in the dregs.
Timing is what makes today's announcements so interesting and unusual. Just when investors are greatly uncertain about where to put their money, Microsoft stands up to be noticed. The company just:
- Committed to a huge repurchase—nearly as much as it would have spent to buy Yahoo
- Agreed to pay a dividend to shareholders of record before Nov. 20
- Shone a spotlight on its seemingly bargain-basement stock price
Microsoft does have something to show to potential investors. Ten days ago, I did a quick financial comparison between Microsoft and Wal-Mart. In its most recent quarter, Wal-Mart reported $101.6 billion in revenue, which unsurprisingly walloped Microsoft's $15.84 billion in sales. But Microsoft's net income was higher—$5.68 billion to Wal-Mart's $3.39 billion. For the 12 months from Jan. 31, 2007, to the same date in 2008, Wal-Mart reported $12.9 billion in earnings. For calendar 2007, based on my math, Microsoft's net income was $16.9 billion. The point: Microsoft is a highly profitable company with high margins, too. Today's announcements are but a reminder.
On Thursday, I joined my 86-year-old father-in-law at a lunch pitching some new investments (Disclosure: I don't invest, for obvious conflict-of-interest reasons). He needed a driver, and he's company. During lunch, my father-in-law's financial adviser asked me about Microsoft, knowing that I report/blog about the company. Naturally, he turned the conversation to Microsoft financials. "They're due," he said, referring to strong revenue growth yet lagging share price. Time has to come for the shares to rise, he predicted.
I had just finished writing the above sentence when an e-mail from Google Watch colleague Clint Boulton popped into my in-box. Clint forwarded a report from Citi Group analysts Brent Thill and Reid Menge. They write:
"We expect MSFT could potentially accelerate the new buyback plan considering MSFT completed the previous buyback plan in 3 yrs (authorized for $40bn over 5 yrs) and the plan before in 2 yrs (authorized for $30bn over four years)...At 11.5x FY09 EPS, MSFT stock is favorably priced relative to its peer group and EPS growth."
At a time of marketwide instability, Microsoft is calling out itself as a safe investment—and not just for stocks but for technology. It's quite deliberate that Microsoft chose Wall Street as the venue for Windows HPC Server 2008's release to manufacturing. The message is subtle: The company and its technology are rock-solid stable; safe enough for the big transactions. Sure, Microsoft wants to sell HPC Server 2008 to financial institutions, but there's another message the company can deliver: The server software division is growing gangbusters. Windows Server has posted double-digit growth for about five years. The company and its technology are safe bets.
As for software sales, HPC is just the showcase product. The upheaval on Wall Street means technology systems are in turmoil, too. Lehman Brothers is selling assets as it liquidates and Bank of America is absorbing Merrill Lynch. Sure, IT systems and personnel may go along, but there's no guarantee that the acquirers will keep them. The value increases or decreases depending on how the IT assets fit with existing systems, processes and personnel. That creates opportunity to sell new products, which for Microsoft could mean server and virtualization software. Nobody's going to get fired for buying Microsoft.
Microsoft also is communicating something else—through its willingness to take on debt: Belief in capital markets. Credit and lending are principal instruments of investing and commerce, perhaps, as the recent crisis suggests, to a fault. Microsoft's willingness to borrow expresses its confidence in banks and other lenders. Who wouldn't want to lend to Microsoft, with its balance sheet?
Something else: According to The Wall Street Journal, "Microsoft's latest repurchase effort also signals no big acquisition plans on the horizon." I couldn't disagree more. The company's willingness to take on debt and the size of its cash horde are reasons to expect the acquisitions will continue, if not accelerate. I agree with Brent and Reid, who write: "We expect MSFT will remain very active in software and Internet M&A. With more than $24bn in available cash, OCF per year over $22bn, and authorized debt financing up to $6bn, we believe there is plenty of flexibility on new acquisitions." Absolutely right, guys.
At a moment of crisis, Microsoft is being calm, trying to make a timely sales pitch. There are reasons why Microsoft is so successful a company. As I started this post, I got this image of Mad magazine mascot Alfred E. Neuman, who is known for the expression: "What, Me Worry?" That's what Microsoft is conveying to Wall Street, but more: "What, You Worry?"
By the way, I would love to add a caricature of Steve Ballmer as Alfred E. Neuman. If you an artist who would be willing to do a quick drawing and give permission for its accompanying this post, please e-mail me.
[Please send your tips or rumors to watchtips at live.com].
Comments (9)
Ever since I first read Bill Gates's Letter to Hobbyists, it's been a long-held opinion of mine that Microsoft is a financial company, not a software company. They just happen to finance software.
And considering their current market cap and the overall dismal state of the financial industry, the prediction that Microsoft is a safe financial bet is quite probably true, at least in the short term (meaning the duration of the upcoming Second Great Depression, which won't seem short at all to most of the world).
But safe technology bet? Well, technology by itself is meaningless; financial stability is far more important, and technology is only one means to get there. But for another view of Microsoft's rock-solid technology (knowing that rocks can have cracks and cause landslides):
Computer crash brings LSE to a standstill
www.guardian.co.uk/business/2008/sep/09/londonstockexchangegroup.stockmarkets
The London Stock Exchange began a "root and branch" internal investigation last night after it suffered a humiliating computer failure that swiftly curtailed a resurgence in shares following the rescue of Fannie Mae and Freddie Mac....
In June last year the LSE switched from its 10-year-old Sets system in favour of a new platform called TradElect, which runs on Microsoft software. - The Guardian
Posted by Philosopher | September 22, 2008 2:18 PM
The timing is pretty obvious. The shareholder meeting is in November. With the stock down 30% YTD and threatening to break to its decade lows, Ballmer knew he needed something to placate them and keep his job. It's a pretty good scam really. First, you screw up enough that the stock sets news lows on a relative valuation basis despite being flat for most of this decade already. Then, you save your job by using shareholder money to cover up your mistakes. And some are even stupid enough to thank you. This is an example of how screwed up and unaccountable public company management has become.
Posted by paul | September 22, 2008 2:25 PM
Microsoft's press release on the subject states: "The company received corporate credit ratings of AAA and Aaa by Standard & Poor's Rating Services and Moody's Investors Service Inc., respectively. The commercial paper is rated A-1+ by Standard & Poor's and P-1 by Moody's, the highest ratings available from both agencies." Yup, among other things, Microsoft is indeed "calling out itself as a safe investment", as you put it.
Posted by JohnJ | September 22, 2008 3:07 PM
"Microsoft is indeed "calling out itself as a safe investment", as you put it."
Safe? It's off 55% since Ballmer took over and has a negative *10 year* return.
Posted by PeterG | September 22, 2008 3:26 PM
I guess MS is recognizing and helping their transition from a "growth" company to a "value" company. I guess you should expect to see them in more "value" mutual funds and in fewer "growth" mutual funds. I think their stock price has been making the transition from expecting big long term growth, to small growth but with preserving value. I guess their selling point now is how safe the Windows/Office business is. How much money can they milk from this franchise and for how long before other new "growth" companies take over. You can certainly still do well this way, just look at IBM. This is probably a better model once you hit this size anyway.
Posted by smist08 | September 22, 2008 4:38 PM
@Philosopher :
"And considering their current market cap and the overall dismal state of the financial industry, the prediction that Microsoft is a safe financial bet is quite probably true, at least in the short term (meaning the duration of the upcoming Second Great Depression, which won't seem short at all to most of the world)."
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I think Philosopher mostly summed it up quite nicely. But I have to add a dark side to all this, you knew it was coming. While true that M$ has such gobs of cash on hand, and is buying back its stock, it may not be enough to keep the price of the stock at the current levels.
Remember, M$ is at present losing desktop market share, at a fairly alarming rate. The Zune is a total failure as far as profits. The Xbox, will most likely never repay the money that was put into it, and the repairs for faulity XBox360's. M$ Live/MSN is losing money now on a regular basis. A recession, or worse, a depression, will negatively affect the sales of new computers in the United States, and therefore the software sales of Microsoft Windows and Office, the two main cash cows of M$.
The recession will also affect Apple, and most likely Apple will have to reduce the prices on its Mac computers in order to compete, also cutting more into Microsoft sales. As people tighten up on buying new computers and laptop, expect OEM's to come up with the brilliant idea of putting Linux or no operation system (or freedos) on their desktop and laptop computers, so as to cut the cost. This would greatly affect the bottom line at Microsoft.
Most likely one would do better gambling on gold.
Posted by chips (also know as chips b malroy) | September 22, 2008 5:08 PM
One of the reasons to buy your own stock is because the price is dropping, and this keep the stock price stable. Since they (MSFT) is buying and the price is not going up, this means when they stop, the price will go back down.
Posted by The Hand | September 22, 2008 5:12 PM
The real question is what is Microsoft going to do about the fact that not only PCs access the web these days? Nettops and mobile phones are becoming the computers for non-work purposes, but Microsoft seems to have a problem with them. Nobody likes WM6 and there is only so long they can keep shipping XP on Netbooks.
I think the best thing to boost Microsoft's stock would be to fire Ballmer and split the company into at least 2 separate companies with their own objectives.
Look how Google has become the default search provider on nearly every non-Microsoft device. Live could not do that because of their obligations to the Windows team. They should stop protecting Windows at all costs because it is their biggest downfall. The video app you demonstrated yesterday is a good example, you cannot export in MP4 because that would damage Windows, even though that is what everyone wants.
Posted by billybob | September 23, 2008 8:36 AM
Another reason to buy your own stock and keep the price up,is because the fat cats at the top, want to sell off some their stock. While I am impressed with this article that Microsoft is buying its own stock, I would be more interested in who the "sellers" are. If they turned out to be Gates, the Gates Foundation, Ballmer, and Alan, then I would say, that maybe something underhanded is going on.
Posted by sam (little s) | September 23, 2008 10:12 PM