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Microsoft To Buy Back $40bn of Its Shares
phantomflanflinger writes "As you may have heard already, Microsoft have announced their intentions to buy back $40 billion in stock from their investors, in the biggest single buy-back plan in business history.
The announcement has given Microsoft shares a small gain but they still stand significantly below their level in January — before Microsoft's unsolicited bid for Yahoo!. The announcement of the plan has also created new speculation about a now-or-never deal with Yahoo!."
You improve your P/E ratio, ultimately meaning that your dividends get spread across a smaller pool of stocks...makes the stocks more valuable as a blue chip commodity, raising their price. its a good strategy when you're taking a long view, and don't anticipate any future rapid growth. The $40b is controlled by the board of directors, and ultimately belongs to the shareholders. its not a funny money fund. Ultimately the best use of the $ is to improve the shareholder's value.
John Maynard Keynes: "When the facts change, I change my mind. What do you do?"
Not really. They allocate that much over the length of the project and spend it over a period of a few years.
This is generally viewed as the company believing they are under-valued. It's a great time to "buy low" so they can sell them later at a higher price and keep the spread.
Also generally speaking, there's a bit of wealth destruction going on when a company does this because the premium for shares rises over the course of the buy-back.
It's also worth noting they've increased their dividend so investors are getting impatient with all of the cash they have laying about a couple of different ways.
http://www.maxineudall.com/2010/02/should-economists-be-sued-for-malpractice.html
The third reason is to have shares on hand to re-issue as options to current executives and employees without diluting the existing share holders.
stock is like printing money for a company. When they buy back their stock there are less shares out in the wild so they hope the price will go up. If the current price of the stock is significantly less than what they think it is worth, it is a no brainier to buy it back and they get more influence over the company as well (less investors to complain about problems).
If they blew it all right now, it'd be 2x their available cash.
OTOH, they'll more likely spread it over a few years, and skim it off the top of inbound money.
In fact, IIRC they just got done with something similar, and that this is just pretty much a new iteration of that (which probably explains why Wall Street collectively yawned in its direction yesterday).
Quo usque tandem abutere, Nimbus, patientia nostra?
Doesn't make sense to me, come on you stockmarket guys, explain the rationale.
It reduces the number outstanding shares. This good on several points:
1) It counters stock dilution caused from issuing stock options, and previous financings, by reducing the shares outstanding adds shareholder value. (The remaining shares each represent more of the company than they did before.)
2) It improves certain financial markers like 'earnings per share' (and others) because with fewer shares, the EPS and other figures look better. (One can argue this is just a sleight-of-hand to make earnings look better than it is, but the counter argument is that the lower EPS isn't representative of the companies actual strength, because it doesn't account for the 40 billion just sitting there...)
3) A buyback is also an indirect way of distributing value to shareholders. (The direct option is dividends); a buyback by creating a demand and reducing the supply for the shares tends to bolster the prices, providing value to shareholders.
4) MS is sitting on pile of cash and not doing anything with it, that's not in the shareholders best interests, so they should do -something- with it. If the shares are depressed, due to, for example, an unrelated global credit crisis, then a buyback may represent best investment of that money for the shareholders.
IE loses them money and is still the dominant browser, Open Office just got passed up by Google Docs, and Linux hasn't even captured 10% of the market. Last numbers I saw put Linux + Mac at less than 10% of the total market. The 360 is the console that gets the most love for games with serious graphics.
Overall, yes, Microsoft is declining, but their core windows products have declined by less than 10%. It's a little early to be writing their eulogy.
Buybacks are more tax efficient. US shareholders would each be taxed at the dividend income rate for the dividend payment. By doing a buyback, shareholders who would have preferred a dividend can sell a portion of their shares, simulating a dividend, and then only paying the capital gains tax, which is typically lower than the tax for ordinary income or dividends.
The short version: By offering to buy their own stock, they are spending their pile of cash to raise the value of the other shares. That raises the stock price at the cost of the cash they spent. It also signals to investors that this stock is safer to buy, because if it starts to drop the company will step in and buy from them.
Read more about it: http://en.wikipedia.org/wiki/Stock_buyback
I am officially gone from
Actually it demonstrates that your company is in great shape; so great that you think your own shares are cheap and you want a piece of the action. Getting money from stock is not the only way that companies fund their operations. There's cash, bonds, etc...comprende?
Seriously though, my MacBook Pro is one of the best Windows machines I've ever used, simply because the hardware support is dead simple. The drivers are solid, and I can download them from one place.
I think it's much more likely that Microsoft has implementable ideas, they just don't need all of that $40bn to implement them. They're absolutely rolling in cash. They can easily implement all the good ideas they have, many of the bad ideas and many of the pie-in-the-sky ideas and still have $40bn spare. I imagine it must actually be pretty hard to spend $40bn and make a profit with the resulting business. No tech industry in the history of the world cost anything like that much to set up. They'd have to burn money at XBox rates on half a dozen projects and I just don't think there are that many markets big enough to justify that kind of investment.
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Not necessarily.
A significant portion of the salaries Microsoft pays its employees is in the form of stock options rather than cash. Compared to the rest of the industry, Microsoft employees are on mediocre rates. The way it attracts and retains employees is stock options.
It's a good technique because it saves a substantial amount of tax, but the downside is that the constant issuing of shares to employees dilutes the value held by existing shareholders. When the company is growing fast, that's fine, but now there's a downturn, a lot of threats and a whole slew of new companies trying to attract employees.
MS can not afford a major drop in the value of their shares, so they're pre-emptively propping them up with their spare cash instead of issueing the cash as dividends or reinvesting. This isn't a sign of a company in good shape. This is Microsoft girding their loins and settling in for a siege.
"I've got more toys than Teruhisa Kitahara."