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: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.

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.

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.

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