In a Proxy statement that was forwarded to yahoo shareholder a hedge fund stated “ Our company is now moving towards a precipice. It is currently losing market share in its “search” function, our current Board has failed to bring in a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as Chief Yahoo, and it is witnessing a meaningful exodus of talent. It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo. According to public information, Google’s income from operations grew 59% per year over the last two years and while Yahoo’s shrank 21% per year”.
Within the letter to Yahoo shareholders the fund stated “ the Board has failed to bring in a talented and experienced CEO…It is no secret that Google (which hired a great operator as CEO) continues to dramatically outperform Yahoo”.
However, the Board of Microsoft has failed to assign a talented and experienced CEO to guide Microsoft. Microsoft was seeking to offer a 65% premium valued at $45 billion to acquire Yahoo. This acquisition would have added $7 billion in revenue.
According to an article in the Wall Street Journal, an analyst with Goldman Sachs stated “ Microsoft made what could play out to be the stupidest move in its history: a high ball bid for Yahoo”. Reports indicate that the company was offering a 65% premium for Yahoo. This strategy was pursued by current management and approved by the Board. Most Microsoft shareholders are pleased that Microsoft abandoned its foray to purchase yahoo, at a significant premium, Ballmer’s reputation among shareholders was damaged by this episode.
In a November 17 2008 statement ,Mr Ballmer said “ let me be as clear as a think I’ve tried to be publicly, we are all done with negotiations with Yahoo. We have moved on”.
However, in the same interview he stated “ there is potential opportunity with Yahoo for a search deal”. Mr. Ballmer continues to create speculation in regards to intentions for Microsoft and continues to fail to articulate strategy to shareholders.
More than ever, Microsoft shareholders are wondering were Ballmer is leading the company. It’s up to Ballmer to articulate to his Board then to shareholders what his plans are. Eight years into his tenure he has failed to do that.
The company through Mr. Ballmer’s leadership has created strategies of issuing dividends to shareholders and corporate buybacks. In 2004 Mr. Ballmer stated “ As we looked at our cash management choices, our priorities were to increase our regular payments to shareholders, increase our stock buyback efforts given our confidence in the company’s growth prospects, and distribute additional resources in a special one time dividend”. Through these initiatives created by Mr. Ballmer and approved by the Board the company has deployed approximately $115 billion in capital. This strategy has failed to create shareholder value.
For a period of five years Microsoft stock has fluctuated at approximately $24 per share. It has reached a high of $38 and a low of $22 per share. Therefore, since 2004 Microsoft has failed at creating shareholder value.
During Mr. Ballmer's tenure as the CEO of Microsoft he has presided over or pursued poor strategic decisions, displayed ineffective execution and engaged in massive overspending. Mr. Ballmer has adopted a strategy of deploying enormous capital for stock buybacks, offered a 65% premium for struggling Yahoo, and these strategies have failed to elevate the share price and create value.
Numerous companies have had a history of poor performance. As a result they have become vulnerable to shareholder activism. These have included McDonalds, Time Warner, Home Depot, Wendy’s, yahoo, Oracle, Deutsche Borse, Sears, Kmart and Mylan Laboratories.
Hedge funds have utilized numerous strategies to effect change. Firms such as Third Point, Bulldog and Chapman Capital have used letters to CEOS and the SEC to effect change.
The hedge fund Pershing Square utlizied the media to effect change at a target company. The fund established a PowerPoint presentation that was broadcast via the Internet. Approximately 800 shareholders, analysts, and reporters attended the event.
This tactic or strategy produced faster results than traditional methods of pressuring management through shareholder resolutions on the agenda at company annual meetings. Within approximately one week of the media event, McDonalds announced it was proceeding with the proposal presented by Pershing Square.
Eric Jackson of Ironfire Capital utilized the Internet to rally support for a "Plan B" proposal for Yahoo. Through using the Internet "Plan B" obtained support from approximately 2 million shareholders with combined holdings of $70 million.
According to an email that we received from Investor Relations, Microsoft has since 2004 deployed $115 billion in stock buybacks. Despite this initiative the stock continues to languish.
In the email that we received, it was indicated that Microsoft intends to proceed with its past strategy of spending valuable capital on stock buybacks. This indicates that Mr. Ballmer and Microsoft intend to continue engaged in the same practice that for a period of five years has failed to elevate the share price. Mr. Ballmer intends to continue to deploy capital for stock buybacks to the detriment of shareholders. This strategy has proven unsuccessful, however, Mr. Ballmer intends to continue with this ineffective strategy. Therefore, shareholders will continue to suffer and fail to realize a return on investment.
Our first suggestion is the resignation of Mr. Ballmer. As mentioned, during his tenure as CEO he has failed to articulate strategy, engaged in massive overspending and according to reports during a meeting of Microsoft management was unable to instill confidence in executives of Microsoft to acquire stock.
We suggest that Mr. Ballmer resign and an expereinced CEO guide Microsoft to create shareholder value. Icahn Partners during its proxy with Yahoo indicated that Yahoo required and expereinced CEO to compete with Google (which the company had through its appoinment of Eric Schmidt). It is imparative that Microsoft replace Mr. Ballmer as the CEO.
We suggest that Carly Fiorina assume the position of CEO. Ms. Fiorina has expereince within the technology sector. She was instrumental in creating value at Hewlett-Packard. During her tenure she propelled innovation and created shareholder value. We suggest that she be recruited and appointed CEO to replace Mr. Ballmer who for a "long-term" has failed to create any lasting shareholder value.
In our proposal we indicate a brief synopsis of the "New Strategy". The first process is to acquire a major bank. Microsoft has experienced growth in software revenue, however, this sector is limited in continued growth capacity. We recommend that it emulate GE. As mentioned, we recommend that Microsoft acquire a bank and enter the financial services sector.
GE expanded beyond its core technology and through diversification created a financial division that accounts for more than half of its $130 billion in annual revenue. Microsoft can for less than its bid for Yahoo, acquire a company that generates $211 billion in annual revenue. This acquisition presents greater value to shareholders than the Yahoo bid. Microsoft was willing to pay a 65% premium equating to $45 billion to acquire a struggling Internet company. Through our proposal it will pay less than $25 billion to acquire a financial services company that generates $211 billion annually and offers online services.
Through current operations Microsoft generates $17 billion in net income. It is more reflective of a bank. Entering financial services will enable diversification and tremendous revenue and earnings growth.
In our proposal we suggeste acquiring ING. This company within the past couple of years has experienced tremendous revenue growth. According to 2007 Annual Reports the company generated $14 billion in net income. The company operates globally and offers online services which would compliment current Microsoft operations. The company ING could currently be acquired for approximately $16 billion. This is equivalent to one year of Microsoft net income.
Current market volatility presents Microsoft with the perfect opportunity to grow through acquisition. Share prices of numerous other companies are at record lows. Therefore, Microsoft can acquire a valuable asset at an extreme discount. Goldman Sachs is trading at approximately $60 per share. In February 2008 the stock was trading at $225 per share. Hypothetically, Microsoft could acquire Goldman Sachs for $26 billion based on current share prices. This is a dramatic discount from prices in the beginning of 2008.
If Microsoft acquired ING, it could conceivably spend an amount equal to one year net income for the acquisition. The company also has $25 billion in cash. It could also use a percentage of its cash reserve to acquire ING.
In our proposal we also suggested acquiring valuable real estate. Through deeper review and consideration this portion of the strategy has the ability to be delayed. In the proposal we indicated that it would be viable for Microsoft to utilize its cash to acquire real estate and become a landlord of commercial real estate. We stated that current conditions enable Microsoft to acquire valuable real estate at a substantial discount. However, real estate will continue to follow historical patterns of experiencing high and low market conditions. The technology sector accelerates at record pace and therefore technology companies are required to remain competitive. Subsequently, we suggest that Microsoft pursue acquiring a bank then pursue technology acquisitions. This will enable Microsoft to maintain competitive within the technology sector.
Current market conditions enable Microsoft the ability to advance within the technology sector. Consumers are moving from PC’s to handheld devices. We are aware that Microsoft in 2007 created the “O” Phone. We are aware that Microsoft offers Microsoft Mobile.
Microsoft has the capacity to acquire a handheld company at a discount. Dependant on SEC approval Microsoft has the ability to acquire a cell phone company. Since most cell phones have Internet access, Microsoft can place MSN on the cell devices. For example, both Sprint and Research in Motion are trading at low levels. Microsoft could acquire a cell company and have MSN as the cell phone Internet starting page. This would enable Microsoft to acquire a valuable asset and secure a dominant position in the handheld sector.
The company Sprint Nextel was a merger of two of the largest wireless companies. It was a merger of #3 Sprint with the fifth largest carrier Nextel. The combined company operates a digital network with over 40 million subscribers.
It also provides cellular access on a wholesale basis to other carriers at a discount. The company’s wire network offers long-distance voice, Internet, and data network services primarily to corporate accounts.
The company according to 2007 reports generated $40 billion in revenue. It had a gross profit of $22 billion. The company shares in February 2008 were trading at $15 per share. Similar to numerous companies, the shares are trading at record lows. Currently, the shares are trading at approximately $3 per share. The company has a current market valuation of $7.5 billion.
Microsoft was seeking to offer a 65% premium valued at $45 billion to acquire Yahoo. This acquisition would have added $7 billion in revenue. With our proposal Microsoft can spend less than $45 billion to acquire ING one of the worlds largest banks, and Sprint Nextel one of the largest wireless companies. Mr. Ballmer’s strategy incorporated spending $45 billion to add $7 billion in revenue. This involved rejuvenating struggling Yahoo and would have created total Microsoft revenue of $67 billion. It would have enhanced Microsoft net income from $17 billion to $17.6 billion.
Our “New Strategy” involves spending less than $45 to acquire ING and Sprint. Currently ING is valued at $16 billion. As mentioned, Sprint is valued at $7.5 billion. If Microsoft offered a modest premium for both companies it would spend $30-35 billion. This would provide a premium to the company shareholders. It enables Microsoft to acquire two companies for less than Yahoo. Through this “New Strategy” Microsoft according to 2007 reports will acquire ING that generated $211 billion in revenue and $14 billion in net income. It will acquire Sprint Nextel that according to 2007 reports generated $40 billion in revenue. Microsoft through “New Strategy” will have combined revenue capacity of $311 billion. It will have the potential for over $30 billion in net income.
Analysts predict that within 2009 the market will correct and begin to rally. Subsequently, companies that currently have low valuations will begin to realize a elevation in share prices. This will immediately create value. As a result Microsoft will realize a gain on its acquisitions. ING and Sprint are going to correct and increase in value. This will ultimately enhance the value of Microsoft. In the beginning of 2008, ING was trading at $40 per share and Sprint was trading at $15. If the shares elevate to equivalent levels ,Microsoft will realize a gain of approximately $100 billion and $30 billion for ING and Sprint, respectively.
Through combined operations Microsoft will have the ability to accelerate into the wireless market. It will enable Microsoft to secure 40 million subscribers of wireless devices and through this acquisition expand Microsoft Mobile. It will enable Microsoft to emulate GE and establish a financial services division to propel growth. Combined operations enables Microsoft to utilize increased net income to pursue additional acquisitions. It can use its “New Strategy” $30 billion in net income to acquire other wireless companies such as Leap or Telus. It can also expand its financial services division through acquisition. It can offer shareholders an attractive dividend. It $30 billion in net income will offer a compelling dividend to shareholders and still enable the company to pursue growth acquisitions. Within two to three years depending on market conditions, Microsoft can begin to execute a strategy of acquiring real estate.
Our "New Strategy” creates value for Microsoft shareholders. Mr.Ballmer has failed to articulate and indicate a long term strategy for the company. He has pursued massive spending for stock buybacks, and has indicated the intention to continue this process. This will result in billions of dollars being spent on a strategy that for five years has failed to elevate the share price. Our “Plan B” enables Microsoft the ability to have a long-term plan of using its cash and net income to expand into financial services, mobility and real estate. Within approximately five years Microsoft has the potential to dominate the PC market, have a large market share of the wireless market through Sprint, have one of the worlds largest financial services companies through its acquisition of ING and control billions of dollars worth of valuable commercial real estate.
Current market conditions present the potential to execute the strategy and rally support. With poor markets, shareholders will support a strategy that creates value. The strategy enables Microsoft to utilize its cash and leverage current conditions to accelerate growth through acquisition.
We believe that this strategy will prove valuable for individual and institutional Microsoft shareholders. We are confident that it will benefit shareholders. We are also confident that it will benefit hedge funds that currently own Microsoft shares.
The strategy will also benefit Microsoft with providing a long-term growth strategy that enables the company to deploy capital and realize a positive impact on the share price. It will instill investor confidence and enable Microsoft to create true long term value.
We are seeking to rally support to implement the strategy for Microsoft. This will subsequently enhance the value for Microsoft. We are subsequently seeking to start a initiative of creating a “New Strategy” for Microsoft. We are aware that through Yahoo “Plan B” support was rallied within approximately two months. We are seeking to adopt a similar strategy and also employ a strategy utilized by hedge fund Pershing Square, that effected change within one week.
As mentioned, shareholder activism is utilizing new tactics to effect change. Microsoft should not be immune to shareholder activism. It has for a "long-term" displayed poor performance. The company has indicated its intention to continue to deploy capital for buybacks. This will result in using cash in a strategy that for five years has proven ineffective.
WE BELIEVE THAT SHAREHOLDERS NEED TO RALLY TO EFFECT CHANGE AT MICROSOFT. FAILURE TO EFFECT CHANGE WILL RESULT IN SHAREHOLDERS OBSERVING THE SAME POOR STRATEGIES AND MASSIVE OVERSPENDING. SHAREHOLDERS WILL CONTINUE TO EXPERIENCE MANAGEMENTS FAILURE TO ELEVATE SHARE PRICE AND CREATE TRUE LONG TERM LASTING VISION FOR THE COMPANY AND VALUE FOR SHAREHOLDERS.
WE ARE SEEKING TO RALLY SUPPORT. WE ARE GOING TO USE THE INTERNET TO RALLY SUPPORT. WE ARE ALSO ARRANGING A STRATEGY SIMILAR TO PERSHING SQUARE AND ESTABLISH A PRESENTAION TO SHAREHOLDERS, ANALYSTS, AND REPORTERS.
WE BELIEVE THAT IT IS IMPARATIVE THAT SHAREHOLDERS RALLY SUPPORT TO EFFECT CHANGE AT MICROSOFT.
THROUGH THIS BLOG WE WILL REVIEW COMMENTS AND CONTINUE TO RALLY SUPPORT. WE ARE CONFIDENT THAT WE CAN EFFECT CHANGE.
ITS TIME FOR THE REAL OWNERS OF MICROSOFT TO CREATE A "NEW STRATEGY" THAT WILL ADD VALUE TO THE COMPANY.
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