The following table reflects the current, portfolio management strategy at Microsoft (NASDAQ:MSFT).
|MSFT Portfolio Management - Investment Capital|
|Cash & Equivalents||$ 4,432||5.0%||$ 6,956||7.0%|
|U.S. Gov Securities||$ 64,897||73.9%||$ 67,026||67.9%|
|Foreign Gov Bonds||$ 875||1.0%||$ 3,335||3.4%|
|Municipal Securities||$ 385||0.4%||$ 332||0.3%|
|Mortgaged Backed||$ 1,288||1.5%||$ 1,019||1.0%|
|Corporate Debt||$ 5,122||5.8%||$ 7,027||7.1%|
|Corporate Equity||$ 9,588||10.9%||$ 11,911||12.1%|
|Other||$ 1,279||1.5%||$ 1,164||1.2%|
|Total||$ 87,866||100%||$ 98,770||100%|
Instead of deploying so much of its investment capital to cash and government securities, earning a nominal return in the market, MSFT could generate significant value in the market - if it allocated more of its investment capital to business development.
There are many methods of business development. In this case, it means growing the business by developing deeper, (more collaborative), operating relationships with strategically, targeted organizations.
MSFT could develop these operating relationships by deploying more of its investment capital into the global, highly-liquid, publicly-traded equity markets, taking a minority-interest position in strategically targeted organizations.
An equity investment develops an operating relationship more effectively than any other method of business development, because it aligns the economic interests within the operating relationship. An equity investment can be either passive or active. An active equity investment (even a minority interest position), opens a line of communication for greater interaction within the operating relationship.
Using the methodology, strategically identify organizations with a valuable technology (skill) to MSFT. A technology crucial to accomplishing the objectives of MSFT in the market. As an example, examine the MSFT decision to develop a deeper, operating relationship with Nokia.
If MSFT used the methodology of taking a minority- interest, equity position in a strategically targeted organization, then MSFT would have been able to control more of the operating relationship with Nokia. It needed capital, and it possessed a technology crucial to the corporate objectives of MSFT.
This created an ideal investment opportunity for MSFT, especially considering the allocation of investment capital. Instead, MSFT only developed a commercial agreement with Nokia - and missed an incredible investment opportunity. An equity investment opens the door of communication for greater interaction not only between the organizations but also within the operating relationship!
The strategic objectives of MSFT would drive every investment, but the thesis behind a minority-interest, equity investment remains basically the same:
- develop a deep, strategic, operating relationship between the organizations
- build the business together with aligned, economic interests
- generate the benefits of ownership for both organizations in the relationship
As MSFT develops the productivity and platform position in the market, please recognize the need to develop deeper, (more collaborative), mutually-beneficial, operating relationships with strategically, targeted organizations.
As an illustration, consider Intel (NASDAQ:INTC) a strategically, targeted organization. The reason: the INTC chip architecture is critical to MSFT: Windows, Office,
Servers and the Cloud. In fact, it remains critical to both organizations because it represents a significant user base in a very large market.
As a way to generate the benefits of vertical integration, without acquiring the other organization, MSFT and INTC could develop a more collaborative, mutually-beneficial, operating relationship. A minority-interest, equity investment would efficiently develop this type of operating relationship, because it facilitates communication and interaction within the operating relationship and because it aligns the economic interests between the organizations.
An equity investment doesn't have to be passive; it can be active. But in this case, the activism only pertains to developing a deep, mutually-beneficial, operating relationship between the organizations. MSFT could generate the benefits of vertical integration without acquiring the other organization if it accumulated a minority-interest position in the highly-liquid, publicly-traded, common equity of INTC.
The goal isn't to acquire the organization (like Nokia). The goal is to control enough of the organization to successfully build a deep, mutually-beneficial, operating relationship between the organizations. If necessary, the control can be gained through the shareholders of the strategically, targeted organization by using an active, portfolio management strategy with an altruistic, mutually-beneficial argument.
INTC generates approximately 85% of its business in the PC Client Group and the Data Center Group. This market exposure lines up pretty well with the market exposure of MSFT: enterprise, cloud and pc. It's a position of strength for both organizations, and it provides a solid foundation to defend the market!
Both organizations need deeper penetration into the phone and tablet market. The Surface Pro 3 is a great beginning in the tablet market. However, both organizations need a viable hero in the phone market. Why not develop a deep, (more collaborative), mutually-beneficial, operating relationship? Why not work together and build the best phone on the market and capture some of the missed opportunity?
If MSFT married the operating system kernel to the INTC chip architecture for every device (e.g.; phone through server), this combination theoretically offers greater security and seamless productivity, effectively bridging the personal life and the professional life.
Using the ARM chip architecture, Apple, Samsung and Google have captured most of the phone and tablet market. The ARM architecture is now branching into the server market as well as the Internet of Things market. Using the current penetration growth rate, it's only a matter of time before the ARM chip architecture overtakes the INTC chip architecture, which would significantly damage MSFT in the market.
Now is the time to defend the market! MSFT and INTC could work more closely together and develop the best phone in the market. No other organization can effectively bridge the personal life and the professional life, because no other organization has the penetration into the enterprise: the servers and the computers connected to the servers. It's a position of strength for both MSFT and INTC. The organizations could work together to strengthen a weakness from a position of strength?
MSFT deploys almost 80% of its investment capital into cash and government securities, earning next to nothing. MSFT could deploy some of this investment capital into the global, publicly-traded, highly-liquid, equity markets by taking minority-interest positions in strategically targeted organizations!
Capital preservation remains critical - but so does the "creation of value." With a simple modification to the portfolio management strategy, MSFT could not only generate a significant return on the portfolio but also significantly build the business of MSFT!
The Investment Capital of MSFT is a strategic asset! It's Financial Capital! And like Human Capital, it should NOT be wasted! It's a very precious resource!
Using an active, portfolio-management strategy, MSFT could deploy at least 10% of its investment capital to develop the business of MSFT through minority-interest, equity positions in publicly-traded, strategically targeted organizations. The active, portfolio-management strategy would develop deeper, (more-collaborative), mutually-beneficial, operating relationships between the organizations!
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Disclosure: The author is long MSFT, INTC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.