Microsoft's (MSFT) acquisition of Nokia (NOK) announced late last night, is being universally panned by just about every commentator and blogger / Tweeter on the Street this morning, which isn't a surprise, given that the deal will further lower MSFT's margins. Seemingly, the deal looks to be a combination similar to a merger between the Chicago Cubs and the Florida Marlins, two teams mired in last place, with poor prospects to boot.
With a $7.2 billion purchase price, that is about 1- 2 quarter's cash flow for MSFT.
In our SeekingAlpha article written here, and our blog post from August 8th written here, for Microsoft (from our perspective anyway) it was always about MSFT's cash hoard and cash-flow, and this deal seems to put the kibosh on any compelling "shareholder enhancement" news to flow from MSFT on September 19th for a meaningful accelerated stock repurchase plan (ASR) or a special dividend, the latter of which was a low probability event anyway.
We were really hoping to hear about an ASR on September 19th, 2013 when MSFT holds its annual investment analyst meeting. Here is table showing the history of MSFT's cash-flow, free-cash-flow and % of capital being returned to shareholders:
% of FCF
retn'd to s/holder
|6/13||$5.9 bl||$1.8||$4.1 bl||72%|
|Avg||$7.3 bl||$0.9||$6.4 bl||50%|
* CFO = cash from operations
* capex = capital expenditures
* FCF = free-cash-flow
* % of FCF = percentage of free-cash-flow being returned to shareholder in the form of dividend and share repurchases
- 6/30/13 cash balance $77 billion;
- 70% of MSFT's cash balance custodied overseas;
- MSFT's current share repo plans ends 9/30/13;
We were really banking on MSFT to announce an ASR on or around the shareholder's meeting on September 19th, and although it isn't off the table, I do think the odds of an ASR are now greatly diminished.
- 30% of MSFT's cash-hoard is $23 billion, for the U.S. custodied portion of MSFT's cash;
- That would buy roughly 700 million shares of MSFT stock assuming a $32 - $33 average share repo price;
- ASR'ing 700 ml shares of MSFT stock would increase MSFT's EPS roughly $0.20 per share, (using fiscal '13's net income) or a little less than 10% of MSFT's full year 2013 eps of $2.65;
- MSFT could replenish any free-cash spent on ASR, within 4 quarters pretty easily;
In June 2012, Johnson & Johnson (JNJ) closed on their acquisition for Synthes, and then used their Janssen Pharmaceutical minority to repo 203.7 million share of JNJ stock, which represented the bottom for JNJ stock, as the stock traded from $62 to $90 following that deal.
The point is Janssen was a wholly-owned subsidiary of JNJ domiciled in Ireland - could Nokia now be the vehicle that MSFT uses to repurchase shares using their overseas-domiciled cash, which as of 6/30, was roughly $54 billion in value?
With the NOK deal now scheduled to close in early 2014, I guess we won't know for a while. The NOK deal takes any significant return of capital for MSFT shareholder as of the Sept. 19th, 2013 analyst meeting right off the table.
The options market (per one source) is telling us that MSFT is planning just a $0.03 increase in their annual dividend, which is expected to be announced September 19th, 2013. Pretty pathetic, and now shareholders hoping for a return of that cash, have longer to wait.
My own opinion is that this was a terrible use of MSFT's overseas cash. It should have been returned to shareholders. (Readers please feel free to challenge my math on the hoped-for ASR, and tell me where I am wrong.)