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!."

Comments

Re:Why do companies do this?

[Ubergrendle]

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.

Re:$40,000,000,000

[mpapet]

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.

Better for shareholders than a dividend

[paulthomas]

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.

Re:$40,000,000,000

[zubikov]

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?

Re:$40,000,000,000

[ozmanjusri]

Actually it demonstrates that your company is in great shape

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.