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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
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).
The truth is an offense, but not a sin.------R. N. Marley
Could you rephrase that in a car analogy?
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.
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.
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.
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.
Listen to the words of the oracle of Omaha, Warren Buffett, from the Berkshire-Hathaway 2005 Annual report:
Soylent Green is peoplicious!
This sends a very clear message to Yahoo: Let us buy you, or we will buy ourselves instead!
- RG>
Hey pal, this isn't a pleasantforest, so don't waste my time with pleasantries!
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.
"It's the height of ridiculousness to say for those 9 lines you get hundreds of millions."
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?
Comment removed based on user account deletion
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.
Why is there an "insightful" mod and why isn't it "-1"? If I wanted insight, I wouldn't be reading
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.
I am a v1ral sig. Plse c0py me and h3lp me spread. Thank y0u?
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.
It's funny how you couldn't just say "BSD" because then you'd be including Mac OS X too.
"[Regarding the 'cloud,'] ownership was what made America different than Russia." -- Woz
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
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No sig for the moment.
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."
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