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

BUY BUY BUY!

[davidangel]

...a mac. right now.

Re:BUY BUY BUY!

[mrchaotica]

FreeBSD, NetBSD, OpenBSD and DragonBSD

It's funny how you couldn't just say "BSD" because then you'd be including Mac OS X too.

Re:BUY BUY BUY!

[ejdmoo]

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.

$40,000,000,000

[Tubal-Cain]

Isn't that almost all of their spare cash?

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.

Re:$40,000,000,000

[Penguinisto]

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).

/P

Re:$40,000,000,000

[MightyYar]

It's also putting all your eggs in one basket,

Yeah, but MS isn't a mutual fund - they should concentrate on making good (or at least profitable) products and not worry about investing. As a stockholder, YOU should be the one diversifying - not MS. And the simpler they keep their business plan, the easier that is for you.

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

[gbjbaanb]

so therefore.... they should invest that $40bn in something like Linux, Open Document Format, or Google...

wow.. that chair nearly hit me, where did that come from?

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

[uncqual]

It's not always the case that putting more money into your core business gives the best return to your owners (shareholders). There tend to be levels of diminishing returns - the first billion dollars of investment often returns more than the tenth billion dollars of investment does. In particular, this is likely to be true in a business that relies more on IP which is "develop once, sell N times at minimal incremental cost" than, for example, manufacturing where as long as there is persistent unmet demand for the products, investing more in production likely is a good use of cash. Cash is like drinking water -- you need enough, but vast quantities are of minimal additional value and it can become a distraction to figure out how to dispose of it efficiently.

If I were a Microsoft shareholder, I'd much rather see excess cash returned to the owners (shareholders) than invested in unrelated things (like sub-prime mortgages!) in which Microsoft has no need for expertise except to invest their spare cash. In this case, I'd rather diversify my own portfolio through pure plays rather than through muddled investments in what is supposedly a software company but which in fact is more of an investment company. So, I'd like the cash returned to me - the most obvious ways are through dividends or increased stock valuation via buybacks.

Obviously, if the buyback leaves Microsoft cash starved so they later had to borrow money for new development and operations, the buyback would likely (although, not necessarily) have been a Bad Idea. However, if this were to happen, the problem would have been that the board was stupid, not that a buyback authorization was a bad idea since I believe this buyback is at the discretion of the board and they may not buy back a single share.

A buyback can be an effective way to return tax advantaged assets to investors. First, there have been many times when what are now called "qualified dividends" were taxed at ordinary income levels while capital gains were taxed at lower levels - and "tax reform" seems much more likely to repeal preferential tax treatment of "qualified dividends" while retaining some preferential treatment for capital gains than doing the inverse - so it's best to bet on capital gains rather than qualified dividends. Second, dividends are taxed in the year they are paid out - so in order for a long term investor to compound gains, they would have to infuse more outside cash with the "pay dividends" strategy (to cover the taxes paid prematurely on dividends) than to simply "buy and hold" a block of stock for many years and let it increase in value, in part, as a result of buy back rather than dividend payments.

Re:$40,000,000,000

[DECS]

No, spending your capital to buy back stock indicates that you have no ideas for using that capital to build your business, and are instead converting it into value for shareholders (the opposite of diluting your stock by creating new shares).

Essentially, Microsoft is doing what Dell thought Apple should have done ten years ago: shut things down and give the money back to shareholders.

If Microsoft had any implementable ideas, it would be using that $40 billion to make more money, just like Apple has used its capital to rapidly expand its business while earning more cash on hand. Apple isn't buying back its stock because it thinks it can make more for investors building new business than it can by simply giving the money back.

Google's Android Platform Faces Five Tough Obstacles

Re:$40,000,000,000

[Abreu]

Please do not tell moderators what to do.

If you disagree with a poster, you should just respond to the post and explain your point of view.

This is a discussion forum, for crying out loud!

Re:$40,000,000,000

[mollymoo]

If Microsoft had any implementable ideas, it would be using that $40 billion to make more money, [...]

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.

Re:$40,000,000,000

[DECS]

Pundits like to point out that Apple has 5% of the PC market. Yet Apple is sitting on $20 billion in cash.

No, Apple isn't blowing billions on products that don't work, it's turning that capital over to earn more.

Now, name implementable ideas Microsoft has rolled out lately. There's certainly nothing at all in consumer electronics. It only barely started breaking even on Xbox sales after having blow billions to develop it, and the 360 is now reaching its end of life and sales are rapidly tapering off. That's Microsoft's BIG SUCCESS! Everything else is in flames: Windows Mobile, Windows Media DRM, Zune, and every other product it has trotted out at CES over the last decade.

Re:$40,000,000,000

[DECS]

Microsoft spins its R&D into an "Other" category in its earning statements, and that segment blows through crazy billions of dollars. The problem is that nothing tangible results from all of that spending.

Apple has $20 billion, which for a company that earns haft as much revenue and a third the profits, is proportional to Microsoft. The difference is that Apple is growing and building new products and businesses, while Microsoft is servicing the same three monopolies it had ten years ago: Windows, Office, and Servers. Outside of those high profit cash cows, Microsoft hasn't done a damn thing in ten years. All three are now under attack.

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.

Re:$40,000,000,000

[Tubal-Cain]

Please do not tell moderators what to do.

Mod parent up!

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.

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.

A better plan

[dingbatdr]

I think Microsoft should buy up all the mortgage-backed securities it can get its hands on.

That way I won't be forced to buy them (with my taxes).

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.

Re:Why do companies do this?

[Anonymous Coward]

Could you rephrase that in a car analogy?

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:No Slashdotter would admit to owning any...

[mi]

That's fifteen lashes with a wet mouse cord, and a nursing of an orphaned baby-penguin for 6 months. Report to room 2011 down the hall to receive the lashes, and pick up the penguin on your way out by reception.

Re:Why do companies do this?

[jmauro]

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.

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?

[Anonymous Coward]

You're a car manufacturer. You buy a bunch of cars when they're not very valuable, particularly old used cars on the secondary market. You destroy these cars in mass. This in the long term creates better higher demand (thus price/value) for newly-produced cars in the future, because there are overall fewer cars in circulation, particularly old clunkers that people might otherwise use instead of getting a new car.

Re:What does that mean?

[Dan667]

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).

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.

Re:Why do companies do this?

[vux984]

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.

Re:Why do companies do this?

[moderatorrater]

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.

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.

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

[Locutus]

in the last 15 years, Microsoft has lost over $10 billion on Windows CE/PocketPC/Windows Mobile alone. The Xbox venture is probably already around $20 billion and yes, they've lost billions on everything outside of their ability to leverage the desktop OS monopoly. IMO

I figure this is more to keep executives happy and employees happy as they have already seen 30% of their retirement vaporize this year alone.

As far as Vista goes, it is forced onto OEM PCs so they get paid just like they did when Windows XP was preloaded. They might have changed the payment some because of different version packages but it's preload $$$ that keep flowing to their banks and only OEMs going away from Windows is going to slow that down. That's taking a while but gaining momentum every day.

LoB

Re:Could someone explain to me...

[dkleinsc]

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

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.

A very clear message to Yahoo

[RealGrouchy]

This sends a very clear message to Yahoo: Let us buy you, or we will buy ourselves instead!

- RG>

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:No Slashdotter would admit to owning any...

[roc97007]

> and a nursing of an orphaned baby-penguin for 6 months.

Man, I hate that. It makes my nipples hurt.

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.

Comment removed

[account_deleted]

Comment removed based on user account deletion

Re:Why do companies do this?

[city]

I agree, except that you don't destroy the cars, you just take them out of the market place and keep them in your Treasury. The Treasury cars can then be scrapped for parts and given out to employees as an Employee Scrap Parts Options Program.

Re:Vista Sales

[Veilrap]

Um get your facts straight:
1. It doesn't require anything my 4 year old laptop doesn't have. 2ghz pentium M, 1gig of ram.
2. The bugs are greatly exagerated the only relavent one: slow file operations has been fixed since sp1.
3. Um I've run vista just fine on computers NOT marked as vista capable. And this is the same as #1 so you're just inflating your numbers.
4. Service Packs are always in development. THIS IS A GOOD THING.
5. And yet Windows 7 is still a ways down the road.
6. But the ad campaign proved what it was meant to. The majority of the trash talk about vista is just trash talk.
Extra: Vista has no "DRM crap" it only has support of certain DRM functionalities so that its now POSSIBLE for you to watch DRM protected content.
By any rational, unbiased inspection of the facts, your post is a colossal FUD.

Re:Why do companies do this?

[ciaohound]

I understand cars and would love to help you out, but, unfortunately, I don't understand analogies. Are they anything like cars?