Discussing a Private Buyout of Microsoft

PatriceVignon writes "Are private buyout companies setting their eyes on Microsoft? The Financial Times claims exactly that in an article called 'Private equity folk could do wonders with Microsoft', as ZDnet reports: 'Consider Microsoft, which has a balance sheet so inefficient that it would make a private equity investor weep ... The new management could take the axe to Microsoft's $6.6bn of wasteful research and development expenditure. The bloated workforce of more than 60,000 could be slashed, to the point where the huge resulting increase in cash flow would at last permit the company to borrow mega-billions.' Business Week, though, begs to differ: 'practically speaking, it's not going to happen,' and quotes Daniel Primack: 'Snakes on a Plane will win a best picture Oscar before Microsoft gets acquired by LBO firms.' What do you think?"

Comments

Memorable Quotes:

[TripMaster Monkey]

"Snakes on a Plane will win a best picture Oscar before Microsoft gets acquired by LBO firms."

Daniel Primack

"I have HAD it with these muthafsckin' LBO firms tryin' to acquire my muthafsckin' company!".

Steve Ballmer

(The funny thing is, I can easily imagine him delivering this diatribe as he swings a chair menacingly...) ^_^

Come on! 10X Bigger than the Biggest Ever?

[davevt5]

The largest LBO ever completed was RJR Nabisco in 1989 for $31.3 billion. Microsoft's market cap is $260 billion. Slap on that a 20% premium and you're looking at $312 Billion.

Do you think that an LBO of 10X the previous record is going to happen? I think not.

I like the comparison of Best Picture Oscar and Snakes on a Plane. Seriously though, I wouldn't be surprised if that film actually wins best film.

Re:Come on! 10X Bigger than the Biggest Ever?

[Red Flayer]

I like the comparison of Best Picture Oscar and Snakes on a Plane. Seriously though, I wouldn't be surprised if that film actually wins best film.

I'd like to thank the motherf***ing Academy for this got-damn award. I'd also like to thank my motherf***ing wife, my motherf***ing agent, and the motherf***ing director.

Re:Come on! 10X Bigger than the Biggest Ever?

[sp3d2orbit]

Exactly. Any reasonable person can see that its 100% infeasible for this to ever happen. I would think that a professional journalist for the Financial Times wouldn't be so blind, but I stand corrected. At least it will sell some subscriptions.

Google stands a better chance of a buyout than Microsoft (I'm not saying this would happen either). Google has a smaller market capitilization (around $120 billion) and has unrealized revenue in the form of "evil". Seriously, an "evil" Google would be much more profitable than an non-evil version because evil is just so lucrative. On the other hand, no has ever accussed Microsoft of not being evil enough -- I doubt there is much room for growth.

Re:Come on! 10X Bigger than the Biggest Ever?

[soft_guy]

Pretty pictures make great games, but why would I want that for an OS?

And if you did want such a thing, you would have bought a Mac two years ago.

SoaP

[just_another_sean]

I think Snakes on a Plane won't win an Oscar.

Re:SoaP

[markwalling]

maybe. http://www.imdb.com/title/tt0071494/

i haven't seen either, but i googled fer de lance for the ballmer comment below, and this hit came up.

mod me down. i'm on a bad streak anyways.

In My Humble Opinion...

[twofidyKidd]

I think...

"...tak[ing] the axe to Microsoft..."

is a good start.

Re:In My Humble Opinion...

[darthtrevino]

From my parents basement in Wyoming, I stab at thee..

Snakes on a Plane will win a best picture Oscar

[Anonymous Coward]

If Titanic can get one, anything is possible.

And then...

[The MAZZTer]

"The new management could take the axe [sic] to Microsoft's $6.6bn of wasteful research and development expenditure."

And then Apple will produce wondrous innovations, and replace Microsoft as the leading OS supplier, and Microsoft will go under and LBO will write it off as Microsoft's fault somehow.

Re:And then...

[Rix]

Apple could do that *now*, if they'd sell MacOS for commodity systems.

Re:And then...

[99BottlesOfBeerInMyF]

Apple could do that *now*, if they'd sell MacOS for commodity systems.

You're both wrong. MS's monopoly is not dependent upon the quality of their OS compared to other vendors as much as it is upon lock-in and market position. Apple can't compete outside its vertical monopoly unless they can get OEMs to pre-install. OEMs won't pre-install because MS will kill their entire Windows business with discriminatory pricing and that means they're betting the company on the single, unlikely possibility that all the lock-in strategies MS has built into Windows won't work. At the same time Apple is betting their company on the same since they are then decapitating their hardware business and most of their profits.

In short, for both Apple and at least two other, major companies to all take such a huge risk is highly unlikely and could very well get whoever made such a risky decision sued to oblivion.

Re:And then...

[Coryoth]

Microsoft research is a little wasteful, at least in as much as the amount being spent doesn't compare very well to shipped product improvements. The problem, as far as I can see as a complete outsider, seems less to do with MS Research not doing a lot of interesting work (just have a look at some of the people working there, and some of the research papers they put out), and more to do with the gap between MS Research and shipping products. I have no idea if its a communication thing, a management thing, or what, but the end result is that a lot of great research work seems to struggle to find its way into products. It seems that's the real difference between MS and Google or Apple in terms of innovation. MS has the ideas, but sometimes I wonder if there's anyone in the "product development" side actually listening.

Re:And then...

[dslauson]

Seriously. I can't stand people who call having a big R&D budget wasteful. There are a lot of things I don't like about Microsoft, but spending money on Research and Development isn't one of them. I'd rather see them spending money there than just lining the pockets of investors.

Re:And then...

[Vicissidude]

Having worked at Microsoft, mostly because I desperately needed the money rather than actually wanting to work there, I can honestly say they do have some cool stuff used internally which they SHOULD push out to the general public.

Some of the best are their test automation tools which made it a breeze to do work there. With a push of a single button, I could automagically reinstall Windows on 100 machines simultaneously, have it automatically start different automated tests on each machine, upload the results to a central server, and have those results parsed for any problem that came up in the tests.

Of course, the public will never see tools anywhere near like that. Even if they could make it so that Windows wouldn't be pirated, their management is so dense and top-heavy that they can't manage their way out of a paper bag. Mini-microsoft is right, they should thin out their management.

Re:And then...

[shmlco]

Agreed. The second a company kills off it's R&D program and/or manufacturing and becomes a "marketing" company is the second you should dump the stock. They're now on a slow, painful, declining road to oblivion...

Re:And then...

[jonadab]

> I can't stand people who call having a big R&D budget wasteful.

Indeed. The attempted hostile buy-out back in the eighties that forced Goodyear to sell off large portions of their R&D (in order to finance a stock buy-back to evade the buyout) was one of the worst things that had ever happened to that company, and similar R&D cuts would be even worse for Microsoft, since they are after all inherently a technology company, making R&D even more important.

Microsoft does have plenty of waste, but R&D isn't where the real fat is there.

OTOH, a hostile buy-out of Microsoft, while it would be bad for Microsoft, might be good for the rest of the world, because it might let some of the competition close the gap a little, which, given the way Microsoft takes advantage of its monopoly position, would surely be a good thing for many.

Re:And then...

[Skim123]

There's a great blog entry about the automated testing done by the ASP.NET Team at Redmond....

private equity not long-term

[nicolaiplum]

Microsoft's R&D spending might make a private equity investor weep, but private equity investors are around to buy distressed or underperforming companies, make them lucrative, and sell them. They don't care about long-term R&D or having a product pipeline further out than when they cash in their investment by selling the company.
Of course you could starve and loot Microsoft and make a lot of money, but only if your plan is to dispose of the carcase before it begins to rot.

Wha?

[The Angry Mick]

The bloated workforce of more than 60,000 could be slashed, to the point where the huge resulting increase in cash flow would at last permit the company to borrow mega-billions

Some private equity firm thinks Microsoft, one of the richest companies in the world, would be better off borrowing money?!? I thought capitalism was about maximizing profit. When did things change?

I guess I really need to brush up on my economics . . .

Re:Wha?

[jhfry]

As the GP said... he needs to brush up on his economics. The parent is exactly right, the only things that typical companies that show profits can do with their money are:

1. give dividends to investors (boosts stock appeal and encorages stable pricing which...)
2. improve the companies credit rating so that the company can...
3. borrow money at extremely low rates so that they can...
4. lend the money at higher rates and...
5. make more money so that they can...
6. GOTO 1

The benifit of this system is that it keeps the money circulating in the economy. If MS did not borrow and lend, their billions would be out of circulation and our economy would suffer far more than most people realize.

Essentially what huge companies with great credit ratings do is provide extremely low risk investments for lenders and thier customers. So if I buy a low risk (low yeild) CD or bond, the bank I bought it from would then lend that money to someone like MS for a slightly higher rate than they are paying me. Without large, stable, profitable companies like MS taking loans, the returns of my low risk investments must drop as the bank cannot afford lend my money out at those low rates due to increased risk in the loans they issue. Therefore I lose.

If I could stand being any nerdier than I already am, I think I would have gone into econ. Econ is like an infinately variable application... make one minor change then predict how the ripples will effect something completely unrelated.

For example, there are many economists that belive that outsourcing our jobs is actually going to improve our economy and employability once the system has run its course? Sure it's counter intuitive... but with a clear mind and some creative thinking you can see how this might occur.

Is This a Joke?

[susano_otter]

How does cutting R&D and the workforce = good business plan?

And why would Microsoft need to borrow "megabillions" anyway, let alone at the cost of their workforce and R&D?

"Wasteful"

[TheNumberless]

That $6.6 billion of "wasteful" R&D is one of the few things I like about Microsoft. Long-term research without a guarantee of short-term returns is a good thing, and Microsoft is one of the only companies that does it anymore.

Think about all the advancements that came out of Bell Labs, before it had a need to be more "efficient".

Forward Into the Past

[ewhac]

Don't you remember? Michael Milken went to prison. Your "junk bonds" and leveraged buy-outs were disasterous for American industry and productivity.

The 1980's are over, and good riddance. Get over it.

Schwab

It IS about maximizing profit.

[Tracer_Bullet82]

To the buyout firms that is.

What happens in a Leveraged Buy Out is the firm/s would loan money from the bank, making the FUTURE possesion as collateral. Thus the debt will be sadled by the target firm. Meanwhile the raiders/vultures as they usually called(especially KKR) will strip the company, sell it's asset and then sell the firm. Pocketing profits, while the firm itself pocket the debts, not them. These of course has destroyed companies and unnnecessary slashing jobs.

Lately, their newest tactics is they will loan even more money from banks.. to PAY THEMSELVES as FEES for buying the firm. Pocketing up t hundreds of millions. Guess who's taking the debt..And it's all completely LEGAL.

There's been some rumbling within the EU Adminitration about well reviewing the law. So far its up to nought.

While the EU politician aren't in the pocket of businessman/ corporations unlike "some" paragon of "freedom" and "fair play", it is encredibly beraucratic.

There's 8% free float of MSFT in the market.. which the buyout firms can easily buy. 52% in instituition, this is harder to buy but still institutional managers are'nt going to say no to 15% or 20% premiums. Thats quite enough to override the minority shareholder.

Lest you think 300 billion plus is a big number, the trends these days are for buyout firms to gang together. And getting the money wouldn't be hard.

That said though I'll doubt there's going to be a buyout. (Purely my assumption) Gates and Co certainly will have Class B shares. Class B shares are shares that have higher voting previlege/power than normal shares. E'g GOOG class B shares have 10 times voting power than Class A/normal shares.

Re:It IS about maximizing profit.

[SerpentMage]

I think you are getting this wrong. The LBO comes in a buys the firm using leveraged money. Typically these firms are like Microsoft that have very good, but conservative books. You could call them cash-cows. Their stocks tend to be undervalued, eg Microsoft.

In comes the the private equity firms and buy the company outright. They usually do this with the investors money and not banks. Usually these are hedge funds that have a huge pocket book with money to burn. So they buy this undervalued company. The first thing they do, like the article says is issue a dividend. The dividend is given to the investors and thus they have a good return. The dividend is added as debt to the company, but because the company is a cash cow it can support the debt without flinching.

The company that is a cash cow has debt, and is issuing dividends. This is interesting for investors because investors like good dividends. Thus the stock price increases, and the original hedge fund begins to sell their original investment making yet another profit for the investor. People would buy the stock for the dividend and the perception that the company is going to grow.

So does that mean that the stock investor that bought in at a higher price has been shafted? No, it depends what the cash cow company does. Cash cow companies do not need to be slow, but can be dynamic and grow. What the hedge funds are doing is forcing that growth. While many hate hedge funds they do force companies to work for the investor.

Here is what many people forget. If people hate hedge funds then those companies should not be on the market in the first place. The stock market has no love and thus anybody who likes the market for the employee options also has to live by the hedge fund rules.

not you

[Quadraginta]

No, generally speaking it's the silly geese at the Financial Times who do. Or not. This is probably just one of those outrageous speculations that journalists do to provoke outraged responses and boost circulation. Not unlike...uh...never mind.

But the proposition that a rich company would be better off in a borrowing state is not without merit. People forget companies are not people, and the same intuitive "rules" about sensible financial decisions do not apply. It's good as a person to have a lot of cash in the bank. Makes you secure. Not so for a company. A company is not an end-user of wealth, the way people are, but merely an engine for transferring wealth from one group of people (the customers) to another (the employees, investors, and subcontractors) [Value flows the other way, of course, but we're talking cash money here.] The goal is to do so as efficiently as possible. Money received from customers should be "invested" as soon as possible, i.e. transferred to new hires, new capital equipment, et cetera. It's doing nothing useful sitting in the bank. The only money a company should keep lying around is a small cushion for unexpected fluctuations in the market, the price of resources, et cetera.

But why borrow? The reason is that you don't have to wait until you've accumulated enough cash from present operations to invest in the capital expansion necessary to undertake future, more profitable operations. You borrow the money immediately, then start the new more profitable operations immediately, and pay back the loan. Presumably the fact that you start earning bigger money earlier pays for the cost of the loan. Everybody wins.

It's not the same as an individual borrowing money to buy a car, which is more nearly pure consumerism. It's more like borrowing money to go to college. It's much more sensible to borrow the money and go to college at 18, graduate, then pay the loans back over 5 years with a high-paying college-graduate job, than it is to work for 15 years at a low-paying menial job, save up, and finally go to college at age 33.

Count me in!

[MarkusQ]

The only people who would benefit from this are the guys making the buyout. They cut MS to the bone, sell off assets, borrow money, issue dividends, then sell the stock before it can tank. After that, what do they care? They already got their dividend & sold off the stock at some inflated price.

I'm sold. Put me down for $200 worth, and let me get back to you on Monday after I check to see how much more I can kick in.

--MarkusQ

P.S. And, unlike the hypothetical pure-greed investors others were talking about, I'm also doing this for the good of humanity. So I expect a proportionately larger cut when we liquidate Microsoft (God, I love the sound of that)

On Surprises

[panaceaa]

I wouldn't be surprised if that film actually wins best film.

Are you a constant victim of practical jokes or something? Do people pop-out from behind corners and scream "AHHH!H#$!" five times a day? Does your girlfriend leave out pregnancy tests in the bathroom with two lines hastily drawn with a Bic pen? I'm guessing so. Dave, for your own sanity, fix your life so that if SoaP wins Best Picture it surprises you!!!

Slashdot

[Enrique1218]

Fantasies for nerds. Stuff that will never happen.