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

$40,000,000,000

[Tubal-Cain]

Isn't that almost all of their spare cash?

Re:$40,000,000,000

[Intron]

1. Announce plan to buy Yahoo!
2. Watch stock plummet
3. Buy back $40bn
4. Profit. Yahoo!

Re:$40,000,000,000

[Anonymous Coward]

That's about the stupidest thing I've ever heard. Companies don't survive today to deliver shareholder value year over year unless they diversify both their product portfolios and sales regions. Its a simple fact, big companies weather financial difficulties much better. I work for a fortune 100 company that has 3 major divisions in 150 countries with a very diverse product portfolio.

Re:$40,000,000,000

[amorsen]

So my small bit of M$ stock should go up in value, yes?

Not necessarily. You'll end up with a larger slice of a smaller pie. Your stock changes value only if "the market" decides the buyback is a particularly good or bad idea.

Re:$40,000,000,000

[MightyYar]

Nice tone.

You don't think MS is diversified? Are you serious? They have 90% of the consumer PC market, nearly 100% of the business PC market, roughly half of the server market, about 1/3 of the video game console market, and a substantial chunk of the smart phone and PDA market. They have nearly 100% of the office software market, and many of their other products are successful as well.

I'm not saying that they shouldn't keep spending money on R&D, but I think they have that covered. As a big and mature business, there is nothing wrong with directing some profit toward the stockholders.

Why do companies do this?

[Finallyjoined!!!]

Why not spend $40bn on other stock.

Doesn't make sense to me, come on you stockmarket guys, explain the rationale.

Re:Why do companies do this?

[Rayeth]

Mod Parent Up Informative

Also note that by doing this Microsoft isn't required to use all of that $40bn either. If they see something more attractive they can always shift the money around later.

Also note that just sitting on a ridiculous amount of money (like the ~$30bn Microsoft has) is a terrible financial move. The board is right to do something with that money, and if they can't get Yahoo (all or part) with it, then best to do something worthwhile rather than sit on their hands and hope something good comes along

Re:Why do companies do this?

[OldManAndTheC]

Listen to the words of the oracle of Omaha, Warren Buffett, from the Berkshire-Hathaway 2005 Annual report:

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That
won't change, moreover, because the deck is stacked against investors when it comes to the CEO's pay.
The upshot is that a mediocre-or-worse CEO - aided by his handpicked VP of human relations and a
consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo - all too often receives gobs
of money from an ill-designed compensation arrangement.

Take, for instance, ten year, fixed-price options (and who wouldn't?). If Fred Futile, CEO of
Stagnant, Inc., receives a bundle of these - let's say enough to give him an option on 1% of the company -
his self-interest is clear: He should skip dividends entirely and instead use all of the company's earnings to
repurchase stock.

Let's assume that under Fred's leadership Stagnant lives up to its name. In each of the ten years
after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share
on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to
repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated
158% by the end of the option period. That's because repurchases would reduce the number of shares to
38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding
earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself
improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant's earnings
had declined by 20% during the ten-year period.

Fred can also get a splendid result for himself by paying no dividends and deploying the earnings
he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these
initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically - with Stagnant's p/e ratio
remaining unchanged at ten - Fred's option will deliver him $63 million. Meanwhile, his shareholders will
wonder what happened to the "alignment of interests" that was supposed to occur when Fred was issued
options.

A "normal" dividend policy, of course - one-third of earnings paid out, for example - produces
less extreme results but still can provide lush rewards for managers who achieve nothing.
CEOs understand this math and know that every dime paid out in dividends reduces the value of
all outstanding options. I've never, however, seen this manager-owner conflict referenced in proxy
materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally
that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them
capital that is free.

It doesn't have to be this way: It's child's play for a board to design options that give effect to the
automatic build-up in value that occurs when earnings are retained. But - surprise, surprise - options of
that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted
for retained earnings seems foreign to compensation "experts," who are nevertheless encyclopedic about
every management-friendly plan that exists. ("Whose bread I eat, his song I sing.")

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can "earn" more
in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning
toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the alltoo-
prevalent rule is that nothing succeeds like failure.

Re:Why do companies do this?

[TheRaven64]

Also note that just sitting on a ridiculous amount of money (like the ~$30bn Microsoft has) is a terrible financial move

Not necessarily true, it depends on the rate of inflation. In times of economic growth then money you keep as 'cash' is earning interest (so increasing in value) and is highly liquid so can be rapidly transformed into other forms of asset, allowing the company to take advantage of new opportunities easily. Since money is backed by the government, it is much less of a risk than most stock investments. In times of economic slowdown or (related) high inflation you are unlikely to see much return - the money may even lose value while you hold it - and the opportunities for turning it into something else are much more rare and so it doesn't make sense to hang on to it.

It's funny, they've been having a lot of trouble

[jollyreaper]

Microsoft has made a lot of money off of OS and office products but hasn't been equally successful with the side ventures. Vista has been such a tremendous flop, I wonder what their internal projections are looking like for the next five years. I think it's arguable to say that the advances they've made in other segments stem directly from their control of the desktop. If they lose the desktop battle, will their products remain compelling enough to hold onto the beachheads in the server room, in the development shops? I doubt they'll dry up and blow away overnight but it looks like there's a serious possibility of a reduced relevance in the future.

Probably Better than Losing it Bit by Bit

[CodeBuster]

This is probably better than losing the whole pile bit by bit to enterprising attorneys and their clever lawsuits AND with the markets being so depressed right now and the number of good alternative investments diminished it probably does make sense to recapture some of those outstanding shares while the price is still attractive.

Debt is cheaper

[zubikov]

All this means is that debt is a cheaper and more risk-averse way for them to finance their crappy commercials and world takeover plans. In this market, you can see billions in capital evaporate in minutes. Not to side with Microsoft, but it was a good move as the market is about to take a dump.

Speaking as a shareholder:

[rssrss]

I am happy they are doing this. I wish they would buy back more stock instead of crapping around with Yahoo, and conducting R&D that they will never commercialize. Also they raised the dividend from its current crappy l1 cents to 13 cents which is still crappy. They should raise it to at least 40 cents.

Mark Cuban was right ??

[pacificleo]

Mark cuban recently wrote a post about the correlation between shares Buyback and Collapse of Financial powerhouse like AIG-Lehman and ML . I hope MSFT can avoid that fate. http://blogmaverick.com/2008/09/16/the-aig-lehman-merrill-lynch-link/

Re:Could someone explain to me...

[zubikov]

Microsoft can loose a lot of money quickly being in the equity markets, especially when the markets move +/- 5% a day. Their CFO concluded that going forward, it will be cheaper and less risky for them to raise new money with bonds, rather than stocks. This is not a sign that they're in trouble, rather a move to hedge against a sharp decline in the overall stock market.

It's about the issuance of high-quality debt

[matthaak]

Consider this move in the context of the financial system meltdown, with US Treasury bonds at 40 & 50-year lows.

The *officially stated* purpose of this action is boosting MS share values. But they are almost completely going to deplete their entire cash reserve to buy back shares. From now on, they'll use debt -- bonds -- to finance expansion and development.

They're bond rating is "AAA", which only 5 or 6 other companies and the government have.

What's interesting is that with lending seized-up around the world, we know that money creation is basically halted. So, I wonder if there wasn't a little pressure on Microsoft to convert to a debt-financed operation & flood the market with new, high-quality debt, thus creating new money.

Sign of a Dying Company

[Nom du Keyboard]

Once I read an insightful article that pointed out how a stock buyback is the sign of a dying company.

Why would it be that, you ask?

Because a company who can't find a better place to invest their cash in expanding themselves into new areas (as opposed to merely buying back their stock) clearly has no vision or wish to be anything more than they already are.

Re:Sign of a Dying Company

[dave562]

When a company owns, what... 80%+ of the desktop computer market, the lack of desire to be "anything more" might not exactly be considered failure.

Re:Sign of a Dying Company

[nschubach]

Here's my question... pretend you are an investor, you see the stock value is going down. You see that they are shifting advertising routes, losing market share to competitors, losing money on XBox, Zune, whatever... What would entice you to push all your money into that company?

How is that any different than a company doing the same thing. Sure, it raises stock price/dividend over the short term, but it shows you that they don't plan on doing anything outside the flow of "normal business" which they haven't really been practicing for a long time. What makes you feel comfortable about that buy?

Re:No Slashdotter would admit to owning any...

[Anonymous Coward]

I don't own any but this is a positive sign that'll get me to take another look at their stock. Some people - like the Motley Fool crew (whose self-proclaimed performance charts exemplify the saying about "lies, damned lies, and statistics") - say that buybacks aren't a good sign, that the company has run out of ideas or is weak. Personally, it says to me that they're focused on creating shareholder value and buybacks are a solid way to do that, especially when the company has a dividend. Buybacks and dividends are two policies I take as signs that a company's leadership may not have that kind of "double-digit growth ad infinitum" mindset. It's not a perfect policy, but it's a reason to check them out.

The problem most every publicly traded company has is that the expectations of Wall Street are almost always short-term, unforgiving, and unrealistic. It'd be nice to think that after the internet bubble and the collapse of the financial sector, that perhaps investors would grow a brain and set more realistic expectations for their investments and thus companies would start to think past one or two quarters in the future. Instead the likely result of the recent problems is that a lot of Wall Street are going to run to gold, commodities, foreign investments, and Berkshire Hathaway for a few months and then go back the same old routine.

Should I ever start up a company and need the kind of money an IPO can bring, I'd only do it if I had a solid plan for how to get the company back to being a private enterprise in some number of years. Private companies are the only ones allowed to have much sense; they're also the only ones allowed to treat their employees well without eventually shrinking the benefits more and more because it helps the next quarter's expenditures - even if it lowers productivity.

Re:Vista Sales

[jollyreaper]

"Vista has been such a tremendous flop"

Do you have any idea what an idiot making such an inane assertion makes you look like?

The smart and observant kind of idiot?

By any reasonable measure, Vista has been a tremendous flop. Just look at the kind of marketing money Microsoft is having to spend to convince people it isn't.

1. Requires insanely beefy hardware while offering the average user little more functionality than XP
2. Launched prematurely, too many bugs to count
3. Lies and falsehoods about hardware requirements, too many machines sold as "vista capable" that obviously weren't.
4. First service pack in development before the OS even shipped.
5. Microsoft forced to unveil Windows 7 years early to convince people that better is coming.
6. The name Vista is such poison that Microsoft had to base an entire ad campaign around the whole Mojave thing, getting people to try the OS without the Vista name because they knew just hearing "Vista" puts a bad taste in the consumer's mouth.

Vista represents what, six years of development, $12 billion? And all that additional DRM crap is thrown in to reduce your system's performance.

By any rational, unbiased inspection of the facts, Vista is a colossal failure.

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[account_deleted]

Comment removed based on user account deletion

Re:It's a Dog

[Reziac]

I don't play the market. I've had the same stocks for a long time -- some for over 35 years (mostly stuff like Exxon and Philip-Morris). Bought a small chunk of M$ about 10-12 years ago, but it's not a major investment by any stretch. And 2% per split isn't a bad cost to pay when your money is being doubled every 6 months, as used to be the case with M$. I don't think it will ever do that again, but I'd like to see it up in its midrange before I'd consider selling it (if I do so). I've observed that it's never good policy to sell when an overall-sound company's stock is in a doldrum... because eventually it WILL go back up, and by selling early you did nothing but screw yourself.

I'm not a fan of rapid stock market growth, tho -- I like steady and reliable and stable, so the company isn't utterly at the mercy of people who just want quick profits. IMO companies being beholden first and foremost to shareholders, and therefore to improving the short-term bottom line rather than looking to the company's long-term health, has done a lot of damage.