Is Microsoft Out of Ideas?

"Sometimes money buys you everything and nothing."
-- Prince, from the song Condition Of The Heart

Yesterday Bloomberg reported an analyst's expectation that Microsoft (MSFT) would institute a $20 billion share buyback program.

There hasn't actually been a formal announcement from Microsoft that I have seen, yet the news has rapidly spread around the Internet as the Bloomberg report was picked up by bloggers, news sites and technology sites.

UBS analyst Heather Bellini expects Microsoft to complete the repurchase over the next three months, and that the amount is at least five times larger than its average share buyback per quarter in the last fiscal year, according to the Wednesday Bloomberg article.

So what does this mean?

Earnings -- 

When companies buy back shares, net income is spread across fewer shares. This results in an apparent increase in earnings per share even if total income stagnates. A buyback of this size might raise Microsoft's EPS by as much as $0.10 per share.

Strategy --

The size of this buyout would be a confirmation that Microsoft is out of ideas. With the deal to acquire Yahoo (YHOO) apparently dead, Microsoft seems to have nothing else to do with the money than to buy back shares. To me this is an indication that there was no plan beyond buying Yahoo and that Microsoft has no significant new initiatives in the pipeline. The reliance on doing a deal shows that Ballmer and Icahn are birds of a feather with no real strategy beyond buying and selling assets.

For those of you who would like to see a resurgent Microsoft stock trading higher based on organic growth and compelling new product introductions, you may have to wait for quite a while. In the meantime, financial shenanigans appear to be the rule.

Comments

[icandoitdon:]

stock buybacks are sure to be a crowd pleaser for the know-nothing crowd who follow screwballs like cramer.

there is no such thing as a growth stock that squanders precious capital on share buybacks.

2008 Aug 08 11:07 AM

[techy:]

what if i tell you that if i had 250 billion i would buy msft in a heart beat.

in other words, if you dont have a good use for all that cash, why not return some to the shareholders.

yes they dont have any idea to grow....they have tried but failed, why dont you pitch in if you think it is easy to grow a company of msft size??

but frankly i am not convinced that msft management has decided to reward shareholders.....i still think they are going to buy yahoo in some kind of deal.

if yahoo management with less than 5% stake in the company could not be forced by shareholders to add some value, how can anyone force msft managment with a huge stake to do so.

2008 Aug 08 11:27 AM

[techy:]

i forgot to elaborate that if one is looking to buy a cash cow...it is msft, so is it not the best use of money for msft to buy itself rather than buy a sinking ship yahoo, by paying a huge premium, and then lose ton of money because the merger did not yield much gain.

2008 Aug 08 11:30 AM

[Depressedal...:]

When you research biographical articles on Bill Gates you come to the realization that Bill Gates is more of a bussinessmen than an innovator of "new ideas." He took the invention of the computer and masterminded "sweetheart" deals with third party software companies. He openly admitted that he routinely went through the waste baskets of the programers to get "fresh ideas" with regards to his operating systems. He purchased Windows XP from a computer programer. Like General Motors, Ford, and Chrysler, Microsoft (Bill Gates) has never listened to the wishes of computer owners. There were thousands of signatures from Windows XP users to request that Windows XP would still remain in existence along with technical support. Nope! instead, Bill Gates was determined to "force the public" to purchase VISTA which
was not accepted by the consumer! This has backfired on Bill Gates! VISTA sales have plummeted with or without the existence of Windows XP! Now, he is hoping to obtain revenue through the purchase of Yahoo! Sorry! When Microsoft tried to recapture some of the revenue through the invention of zune, a Microsoft copy of IPOD, it failed miserably! Now, once again, he is attempting to capture needed revenue through obtaining Yahoo in which is thinks will capture some of that revenue from Google! Fat chance! The decrease in Microsoft software sales has been boom for Apple computers and now that You Tube has shown to the public, the stability, ease of use, and the low costs of Linux software, Linux Ubuntu and all other Linux programs like Mephis, Mandriva 08, Fedora 08, Suisse, and about 70 other Linux OS programs are starting to get recognition by the computer/business consumers as well as the school systems en masse throughout the US!
The number one lesson that big corporations have preferred to ignore when then become a mega corporation is that YOU NEVER EVER EVER dictate to the consumer WHAT they will or will not purchase! Arrogance sets its own downfall! General Motors, Ford, Chrysler have always pursued this dictate along with the "short term profits." There has been NO articles on any "new projects" of Microsoft, unlike Apple's or Linux! When any large corporation does NOT have a well-funded research and development team, its financial future looks grim! Unless Microsoft starts to implement programs for new products rather than trying to copy other products/services from other competitors, i.e. IPOD, Google; their company will start its downward spiral pretty damn fast!

2008 Aug 08 11:36 AM

[BigWally:]

At the rate that Bill Gates is dumping shares, I'd say MSFT is kaput........

2008 Aug 08 11:39 AM

[bobbobwhite:]

depressedallday said it pretty good, but he did not mention an idea that Warren Buffett does so well and so profitably that would be great advice for his buddy Gates........these days, don't expect one type of company in one industry to do it all, so why not finance a number of innovative, well run and profitable companies with all that extra MSFT money, instead of buying businesses in the same tech arena as MSFT? And don't put them under the MSFT name. No matter that they are not IT, as Gates is into medical innovations now anyway so no new "gates" would be crashed by getting into other industries with great potential in established, new or even developing markets. Find innovative companies with great management, and get the rest of how to do it from Buffett, as he knows it pretty well. I even think he would not charge Bill for it.

2008 Aug 08 12:00 PM

[Jonathan Scott:]

i do not see any connection between a stock buy back and no ideas? If MSFT announced a goal to spend the same dollars on R&D, you would write this is proof MSFT is desperate and fruitlessly spending even more on R&D to no avail because all those R&D shenanigans having never produced anything but a 90% market share.

2008 Aug 08 12:18 PM

[H.J. Huneycutt:]

I've been curious to see if they expand more into the SaaS sphere. Barring that, why not institute a share buy back program?

They've failed (and will probably continue to fail) every time they've tried to move out of the realm of software. They should stick to (and expand in) the thing they do best. Otherwise, just find the easier way to increase shareholder value (which is share buybacks).

2008 Aug 08 12:44 PM

[udirtyrat:]

If I knew that the value of my own company is much, much higher and didn't see where else I could grow the company that makes sense, I might as well buy my own shares.
Out of ideas....hardly, but most of the MAJOR companies that have hordes of cash do in fact buyback their own shares. Does this hinder innovation, hardly. If Ballmer hadn't said anything about Yahoo back in Jan 08 the stock would be well over $32. Just the fact that they attempted to buy Yahoo but the question of growth.
This crap sidetracked where Msft was going as a stock price. Now that it hit 25 I'd say the real value here IS to buy back my own shares. Stock is already up about 15-20% since then. Yahoo purchase would put it in a hole of 30 billion of debt that would take 10 years to pay off. Yahoo doesn't have that kind of return value. It's lucky it breaks even. Don't worry in about a year Yahoo will be down to 15. Yang & the board have less than a year to turn things around and that's not likely.

2008 Aug 08 01:19 PM

[Tom B:]

MSFT can't do "the Cloud". MSFT has zero credibility regarding desktop security, let alon ON-LINE security.

As for being "out of ideas"-- there are plenty of ideas out there-- even on the Redmond campus. You need a management structure that can actually implement them and test them BEFORE they get out the door. What happened to Win FS in Longhorn? Lost in the shuffle. How did Vista ever get released? Aside from the fact Vista is insecure and bug-ridden, and slower than molasses, the big problem is that it's still just Windows. MSFT has not understood that they are competing against MODERN, SECURE, HIGH-PERFORMANCE, UNIX-based OS's now (LINUX and OS X). The days when their biggest problem was getting Enterprise drones to migrate from Win 3.x to 95 are LONG over. And the sand has run out. Even if they hired Linus Torvalds, they couldn't hash anything together fast enough to save the company, at this point.

2008 Aug 08 01:31 PM

[Tom B:]

""Out of ideas....hardly, but most of the MAJOR companies that have hordes of cash do in fact buyback their own shares. Does this hinder innovation, hardly."

It increases risk. You bump up your stock price, a bear market arrives, you have just pissed away a big pile of money.

2008 Aug 08 01:33 PM

[sam78:]

Look at Microsoft's R&D budget before commenting that they are not investing in new ideas! It is just that they have this fantastic cash flow which cannot sit on the balance sheet and earn 3-4% interest!

2008 Aug 08 02:51 PM

[cub fan for...:]

I agree with "user". They spend $7 to 8 billion a year on R&D. That's a ton. A better question to ask is why it hasn't been more effective. However, the last time I looked, this company is still growing at 15 to 20 percent per year (including that last five years). With $3 in cash and a PE under 15, it doesn't make them a horrible company. I think it actually makes for a pretty good investment, much better when they were $70 and making less than $1 per share 5 years ago. I agree with a previous post, maybe they shouldn't worry so much about search and they should just try to buy really good companies, ala Buffet. They could save a ton on R&D, get rid of an unprofitable segment of business and begin to build a huge conglomerate for the next century.

All this being said, I am very frustrated with Ballmer. But, as Warren says, "buy companies that are so good that even an idiot could run it, because eventually one will".

2008 Aug 08 03:13 PM

[Jonathan Scott:]

You would have tried to sell the same idea if MSFT had successfully bought Yahoo.

2008 Aug 08 04:30 PM

[yohoho:]

Its simple. MSFT raised its cash position specifically to do a large acquisition (yahoo). When those prospects dropped, they see no reason to hold onto the cash.

Should they instead give it to the poor? No Buy 500 startups? No. Add another 15,000 FTE's? No.

Two choices? Large dividend payout (like they did one other time) or buy back shares. Its not like the company had debt to pay down.

2008 Aug 08 04:48 PM

[Jonathan Scott:]

Cleary if MSFT has 20,000,000,000 in cash that is the proof they have no ideas. That is clear as 20,000,000,000 doesn't just come from ideas it comes from trees.

2008 Aug 08 05:06 PM

[marketwatchr:]

Thats a bad idea, there are better investments that will grow MSFT. If a buyback is done ....New Management is the most important thing MSFT can begin to search for. It's now or not for a long time in the development of business for web of tomorrow. A buyback means Ballmer time is up!!

2008 Aug 08 05:17 PM

[Caltorguy:]

Er...whatever happened to paying out the cash as dividends? If MSFT has essentially become a utility then up your payout and give shareholders a 5%+ yield.

2008 Aug 08 06:20 PM

[Football Geek:]

A special dividend would be great, why not use some of the
cash they generate every quarter. Cloud computing is a
huge future growth area, why not spend some cash there. Yahoo
is falling in price, and if they ( msft ) wait longer they could
buy Yahoo for a better value.

2008 Aug 08 10:49 PM

[James R:]

Percentage wise, Microsoft has contributed much more to IT intdustry than any other companies. R&D bring ideas to the company and the components of R&D are people. Best people always work for the best salaries, and because Microsoft gives comparatively good salaries I think there will always be good ideas!

2008 Aug 11 07:07 AM