Friday, December 19, 2008

Microsoft Is Fooling Itself

We want to thank everyone that has taken the opportunity to review this blog and respond. The “New Strategy” for Microsoft is gaining momentum. Recent developments have the potential to tremendously accelerate this “New Strategy” campaign. We will keep you posted through this blog as the campaign and this new development continues to unfold.


When we created this blog it was our tactic to emulate the strategy of Eric Jackson and “Plan B” for Yahoo. We intend to use the Internet through blogs to rally support from frustrated shareholders to effect change and implement a “New Strategy”.


In 2000, after the dotcom meltdown, companies such as Microsoft had the opportunity to propel growth through acquisition. Numerous dotcoms and other technology companies had lost tremendous value. Current market volatility has produced a market were companies have record lows. However, record lows create the optimal opportunity for companies such as Microsoft with large amounts of cash to acquire companies at a extreme discount. Based on the concepts within the “New Strategy” it utilizes current market conditions to accelerate growth for Microsoft. Subsequently, time is critical. Therefore, we have pursued a relatively aggressive tactic to rally support expediently.




Based on the reality of market conditions and the optimal opportunity for Microsoft to execute the “New Strategy”, we proceeded to immediately post the “New Strategy” on the blog. There was no real prelude or introduction to reasons that prompted this campaign. However, we currently intend to provide information that prompted this campaign.




In the previous posts we have referenced an email that we received from Microsoft Investor Relations. We also reference Microsoft spending $115 billion in buybacks. We intend to post the origins of this information. Within this post we will provide a copy of the email that we received from Microsoft. We will also provide the majority of the responding letter that we forwarded to Mr. Ballmer.




Microsoft emailed us the following letter:




Dear Mr. Montgomery,





Thank you for your letter to Steve Ballmer regarding your concerns.




Microsoft's primary financial goal is driving long-term shareholder value. We aim to grow operating income faster than our technology peers on a sustained, long-term basis. This goal is balanced with other important priorities that we believe lead to success: winning and satisfying customers, driving innovation, leading the industry transformation to services, and building a broad and deep leadership team.




We are focused on execution which has translated to our revenue and earnings growth. Revenue, operating income, and EPS in fiscal year 2008 all grew by double digit percentages.




We’ll also continue to execute on our financial strategy of returning capital to shareholders through buybacks and dividends. Over the past 5 years we returned over $115 billion to shareholders, allowing Microsoft to offer a very compelling return to our shareholders.




Regards,





Microsoft Investor Relations




In late October 2008, we responded to Mr. Ballmer with the following letter:




Dear Mr. Ballmer


This is in regards to the response we obtained from Microsoft Investor Relations concerning the numerous letters that we forwarded to your attention. We were shocked that the letters were so blatantly dismissed and forwarded to Investor Relations. This disregard reflects your same careless, negligent and poor guidance and decisions for the company.




Investor Relations state “ Microsoft’s primary financial goal is driving long-term shareholder value. We aim to grow operating income faster than our technology peers on a sustained, long-term basis. This goal is balanced with other important priorities that we believe lead to success: winning and satisfying customers, driving innovation, leading the industry transformation of services, and building a broad and deep leadership team. We are focused on execution which has translated to our revenue and earnings growth. Revenue, operating income, and EPS in fiscal 2008 all grew by double digit percentages. We’ll also continue to execute on our financial strategy of returning capital to shareholders through buybacks and dividends. Over the past five years we returned over $115 billion to shareholders, allowing Microsoft to offer a very compelling return to our shareholders”.




This response by Investor Relations is na├»ve and delusional. The very notion that it states “ Microsoft primary financial goal is driving long-term shareholder value” demonstrates the negligent regard for failing to achieve long-term shareholder value.




In 2004 Microsoft stock was trading for approximately $25 per share. Within a five year period the stock price has continued to fluctuate at approximately $25 per share with minimal variation.




Investor Relations states “this goal is balanced with other important priorities that we believe lead to success: winning and satisfying customers, driving innovation and building a broad and deep leadership team”. The dilemma with this statement is the phrase “ we believe lead to success”. Based on the fact that the stock price has displayed minimal variation within five years, demonstrates that investors fail to share the same belief and have contention regarding the long-term success of Microsoft.




Investor Relations state “ winning and satisfying customers lead to success”. However, numerous reports indicate the dissatisfaction of consumers with Microsoft products. Numerous articles within newspapers and magazines indicate that consumers are frustrated and dissatisfied with Windows, MSN and other Microsoft products. This is reflected in the demand for open source Linux. Microsoft has over the past five years had difficulty in winning and satisfying consumers.




Investor Relations state another goal is driving innovation. Microsoft has failed to achieve this goal.




Apple Inc was previously a company that was languishing. Through the current leadership and management of Steve Jobs the company through innovation has dramatically increased shareholder value. However, within the same period Microsoft has languished.




In 2004, Apple Computer was trading at approximately $7 per share. Within the same five year period as Microsoft trading at approximately $25 per share, the Apple stock has climbed to a high of $210. The company through new management and strategy has created tremendous innovation and shareholder value.






Microsoft has displayed innovation characteristics that are reflective of a reactive strategy as opposed to proactive. Subsequently, in five years Apple has propelled innovation and created tremendous shareholder value while Microsoft has remained at approximately $25 per share and therefore created no value for shareholders. This demonstrates the contrast in which company is innovative and which is a laggard. Apple has created shareholder value while Microsoft has failed.




Investor Relations state “ a important priority that leads to success is building a broad and deep leadership team”. However, the company has failed to achieve this goal and obtain success. Current leadership has failed to create long-term shareholder value. It has failed to win and satisfy consumers. It has failed to drive innovation. Therefore, the company has failed to build deep leadership reflected in the failures of current leadership.




Investor Relations state “we are focused on execution which has translated to our revenue and earning growth”. However, this is inconsequential to investors. Microsoft could increase revenue from $20 billion to $120 billion, however, if investors are not confident in long-term goals it will reflect in the price investors are willing to pay for stock. Regardless of the fact that Microsoft has increased revenue and earnings, the stock continues to trade at the same five year level of approximately $25 per share.




The execution of revenue and earning growth has had no effect on increasing investor confidence and creating shareholder value. Therefore, investors have failed to realize long-term shareholder value.




Investor Relations state “ we’ll also continue to execute on our financial strategy of returning capital to shareholders through buybacks and dividends. Over the past five years we have returned over $115 billion to shareholders.”




In 2004 you 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 you and approved by the Board the company has deployed according to Investor Relations approximately $115 billion in capital. This strategy has failed to create shareholder value.




Through your guidance and leadership from 2004 to 2008 the company has deployed $115 billion in capital. In 2004, you stated that it was a priority based on the confidence of the company growth prospects. However, despite deploying $115 billion in capital in the five year period, the stock has remained at approximately the same five year level. Historical charts indicate that the average five year price has remained at approximately $25 per share with minimal increase. Therefore, despite deploying $115 billion in capital this priority has failed to create long-term shareholder value. If investors were confident in this approach the stock price would reflect a higher valuation creating true long-term value.




As mentioned, the company in five years has spent $115 billion and has failed to increase the share price. However, with our proposal had Microsoft in 2004 deployed the same level of capital it would currently be generating an additional $20-$40 billion in revenue and have approximately $80 billion in assets. This strategy would have resulted in investor confidence and ultimately lead to an increase in the share price. However, through current management it has wasted $115 billion through ill-conceived strategies that have failed to create any true long-term value.




According to a report within the New York Times, in 2005 you stated that you had trouble selling the long term value of Microsoft stock even to the company’s own employees. The article indicates that you stated “ Are you buying our stock?” to a team of Microsoft executives, “All the hands were down”.




We are confident that if you presented the same question to current Microsoft executives that it would garner a similar reply. For a period of five years Microsoft stock has performed poorly.
Microsoft was seeking to deploy approximately $50 billion in capital to acquire Yahoo. This acquisition will add approximately $8 billion in annual revenue. Microsoft is additionally required to change Yahoo business model and strategy to compete with Google.




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.




According to an article in BusinessWeek, Stefan Selig, global head of mergers and acquisitions at Banc of America states “ With more than $1 trillion in assets controlled by hedge funds, they have credibility and capital. Companies have to take this threat seriously: the balance of power is shifting away from boards and management. You cannot ignore them just because its some hedge fund you never heard of”.




Numerous companies have succumbed to shareholder activism. Companies such as General Motors, Time Warner, McDonalds, Waste Management, Oracle, Sears have had to respond to demands from hedge funds. Small hedge funds such as Breeden Capital forced change at H&R Block. Additionally, Pershing Square forced change at McDonalds. This small hedge fund through a media strategy gained support from dissident shareholders and within one week forced change. At the time of the investment in 2006 McDonalds was trading at approximately $30 per share.




The company had a market valuation of approximately $30 billion. The hedge fund invested in McDonalds. Within one week it through shareholder activism effected change of strategy for McDonalds. The company with a $30 billion market valuation was forced to accept and implement the proposal of the hedge fund.




According to an article with BusinessWeek, numerous large institutions and mutual funds have changed their investment strategy. Several of these firms which would either suffer a loss or sell shares in poor performing companies have recognized the influence of shareholder activism. Therefore, as a result companies such as Fidelity Investments are supporting hedge funds.
We have forwarded numerous letters to your attention. We have indicated that we have strategies that would create long-term shareholder value through deploying capital to new strategies. These letters have apparently been dismissed and the current management will continue to execute its poor strategies.




With five years of poor performance of increasing the company share price, we are confident that there are numerous dissident shareholders. This will include individual shareholders, institutions and mutual funds. As mentioned in previous letters, the five largest Microsoft shareholders control approximately $40-50 billion worth of equity. Each of these shareholders have failed to realize a return on their investment and experience long-term shareholder value. Therefore, we are confident that they will support new strategies that will create true value.
We are also confident that we can rally support from hedge funds. As mentioned, there are numerous funds that collectively manage $1 trillion in assets. Numerous funds currently employ activism strategies to create returns for the funds.




According to reports several firms are expanding and adopting activism strategies to increase returns. We understand that funds have collectively invested to maximize pressure and returns. For example, SAC Capital with $20 billion in assets is investing with Jana Partners with $5 billion in capital to influence TD Ameritrade. We are confident that we can obtain or rally support from hedge funds to influence the adoption of our proposal for Microsoft.




BE ASSURED that based on your dismissal of our previous letters we are going to initiate the strategy of gaining support for the implementation of the proposal. Since this strategy involves deploying capital towards building assets and generating additional revenue it will be supported by hedge funds, institutions and individual shareholders of Microsoft.




The proposal will be implemented with or without you as current CEO. Based on your response to our letters it seems apparent that our initiative will incorporate forcing your resignation as the CEO.




Regards




Craig Montgomery






We are aware that based on the above information there are two strongly conflicting opinions regarding the execution of past strategies and the value that it has created for shareholders. There is also conflicting views concerning the overall performance and future direction of the company. We do not want to appear bias towards our “New Strategy” that will create true value for Microsoft. Therefore, we will provide additional information to support our views and concerns. Ultimately, these facts will be left for discretion to determine which party has the correct view and which party is delusional.




CONCLUSION




Microsoft states that its primary financial goal is driving long term shareholder value. According to CBS Marketwatch and other historical share data, Microsoft has for a period of “long-term” traded at approximately $25 per share.










As reflected in the stock chart, Microsoft since 2004 has experienced minimal variation. It had a minor rally when Microsoft announced the potential acquisition of Yahoo. As noticed in the chart, it rallied to approximately $38 per share in February 2008, at the time Microsoft offered $45 billion to acquire Yahoo in an effort to narrow the market share margin with competitor Google.
After the rejection of the bid by Yahoo, the stock has declined to a level reflective of the past four years. Despite Microsoft deploying $115 billion in stock buybacks, the stock continues to languish with no creation of “long-term” shareholder value.






The annual P/E chart shows a clear downtrend, which keeps negating the positive impact on share price that otherwise might be expected from what earnings gains have occurred.












In addition to deflated P/E , there is subsequently the potential for “earnings” to decrease as well. This will be discussed in greater detail.




Microsoft states that with its financial goal of creating lasting long-term shareholder value, that it includes within its priorities that lead to success: winning and satisfying customers, driving innovation, and leading the industry transformation to services.
Microsoft states within the email The Crandrea Group received, that its priority is “driving innovation” which will both win and satisfy consumers.






1)Microsoft claims that Vista was a success.






Management claims it “sold” 150M licenses and subsequently hails that “success”. But, in reality given a ludicrous 5 year gestation period and reported $5-$6B price tag, media reaction, corporate adoption, FPP retail sales, the company’s own expectations, and most important the competitive need – it’s a drastic disappointment.





















As illustrated within the two graphs, Microsoft has from the third quarter of 2007 to the third quarter of 2008 lost market share to Apple. These graphs only reflect a one year period. Charts with wikipedia illustrate that since 2006 Microsoft has been losing market share within the operating system sector. Apple is gaining momentum with winning customers and Microsoft has progressively losing its market share.




There is additional information provided within the wikipedia chart concerning Operating System Market Share. This chart can be accessed at http://en.wikipedia.org/Usage_share_of_desktop_operating_systems or by clicking on our link contained in this site. Microsoft launced Windows XP in 2001. It launched its update operating system Vista in 2006. The NetApplications chart illustates that approximately in 2008, 69% used Windows XP and 17% used Vista. Despite Microsoft hailing it a success, despite five years of development and a $5-6 billion cost to develop, only 17% use Vista and the majority of consumers have remained with the older Windows XP. Subsequently, this chart demonstrates the failure of Vista and Microsofts failure to win and satisfy consumers with "New Innovation".

The chart also demonstrates that Mac OS with Intel and PPC has collectively grown from approximately 4% in 2006 to 8% in 2008. Microsoft according to the chart has failed to capture consumers while Apple has gained 4% market share in a two year period.




Microsoft through advertising has resorted to creating the mojave campaign. Reality, regardless of calling it mojave, vista, or even windows, consumers are not satisfied. Competitors such as Apple recognize this consumer frustration and have created a advertising campaign that incorporates a mac and a PC. The ads sarcastically exploit that Microsoft fails to call the system vista. These ads by Apple continue to increase the exodus of consumers from Microsoft to Apple. Therefore, it seems that Microsoft is trying to reclaim consumers through hiding the fact its really vista. During the same time Apple is winning and satisfying customers with innovation.



We will be kind to Microsoft and we will at this point not discuss “Longhorn” and the dramatic impact it received from investors concerning the confidence in the management team and the overall company strategy.





Leadership are also delusional about the future implications that this underwhelming release represents. Windows market share, while still above 90%, has fallen . And others, particularly Apple, have been steadily gaining share. Consumers have voiced dissatisfaction with Microsoft and subsequently an exodus to competitors has impacted Microsoft.





More importantly, Microsoft has begun to relinquish undisputed technical leadership in desktop Operating Systems , the core of what the company does, to Apple. It’s difficult to calculate how much of a strategic impact that will have on Microsoft. Although Microsoft will argue that it has increased revenue and earnings, if activity within this sector remains constant for the next four to five years how will Microsoft’s revenue and earning appear?





In four to five years will there be a continued report by Microsoft that revenue, earnings and EPS have grown by double digits?



The possible answer to that question is a resounding “NO”. There is the potential Microsoft will surrender revenue and earnings to Apple and Linux with double digit loss.


The chart at wikipedia illustrates that Mac OS has grown from approximately 4% to 8%. If this growth is maintained there is the potential that within the next four to five years Mac OS could capture 20-25% of the operating system market. Based on the poor response of Vista (17% of market share), if Windows 7 receives a similar consumer response as Vista there is the potential that Mac OS will obtain more than 20-25% of the market.

The only savior for Microsoft is that Windows 7 will be the must-have product that Vista failed to accomplish. Microsoft is required to market a more compatible Operating System to have any chance of keeping up with OS X and Linux. The reality or “Success” as Microsoft stated in the email, is for Windows 7 being customer friendly and ultimately stopping share erosion at whatever level it has dropped to by then.







2) We have a “Success” strategy in Online Market Share.






Microsoft’s Online efforts have been a massive expensive and ultimate disaster. Microsoft’s performance has been the worst of the four major players. It has lost considerable market share to Google. The company Google, has a considerable margin in contrast to Microsoft.

















In an effort to eradicate the substantial margin between Microsoft and Google the company attempted a bid for competitor Yahoo. This strategy resulted in Microsoft offering a 65% premium bid for languishing Yahoo. The bid ultimately was valued at approximately $45 billion. This strategy would have resulted in deploying $45 billion in capital to establish an additional $7 billion in revenue and $600 million in net income. However, these revenue and earnings are contingent on if Yahoo through the merger had the ability to sustain 2007 revenue and earnings levels.






If the acquisition proved successful, Microsoft would have increased annual revenue from $60 billion to $67 billion. Net income for the company would have increased from $17 billion to $17.6 billion. This is based on 2007 Yahoo Annual Reports. Therefore, Microsoft would have spent $45 billion to achieve a modest gain in both revenue and net income. Spending $45 billion to achieve a $600 million increase in net income fails at presenting characteristics of a company driving innovation and winning customers. It is more reflective of a company that failed to recognize the significance of the Internet and like a prehistoric dinosaur is trying to avoid extinction.
















As demonstrated by the above chart, Microsoft and Yahoo combined fail to control as much market share as Google. Within this sector Google experiences a similar characteristic as Microsoft in the operating systems sector. Microsoft has experienced a near monopoly in the operating system sector. Despite a decline in operating system market share Microsoft controls relatively 90% market share. However, illustrated in the above chart, in this sector of service Google experiences a near monopoly. Subsequently, Microsoft is required to adopt a strategy that will enable the company to compete with Google. Currently, Google has 80% market share.

The acquisition according to Charlene Li of Altimeter Group and formerly an analyst with Forrester Research states “the bid appeared beneficial on paper, however, the reality of making the two companies work would have been a nightmare. There are numerous overlaps which would have made the integration complex when all Microsoft requires is the search deal”.
Microsoft despite deploying billions to create an online service and attempting to deploy $45 billion in additional capital, its online service continues to be outpaced by Google. The reality is that its consumer online satisfaction has failed to prove successful and fails to capture consumer satisfaction at the same growth rate as competitor Google.





It has become evident the plan hasn't worked, which is the main reason Microsoft tried to buy its way into competitiveness by acquiring Yahoo, a deal evaporated in May 2008, when Microsoft withdrew its bid for the Internet company.






3) Microsoft believes that it is “Successful” in obtaining consumer satisfaction with Xbox.





Xbox, while financially more successful than the Online division or sector on a comparative basis, it has been a financial disaster. More than twenty billion dollars “invested” over nearly a decade. The reality is that Microsoft has failed to maintain competitive consumer loyalty especially with the introduction of Wii and its increasing popularity. The reality, it’s conceivable that Microsoft will finish last of three main competitors.





















4) "Microsoft is “Successful” in driving innovation and gaining consumer loyalty through mobile services".





Microsoft has been pursuing mobile services and attempting to obtain consumers for several years. It has created and launched the “o” phone. It has established alliance with Sprint Nextel. However, the result is Microsoft is losing market share to Apple and its iphone. While there has been better success in the smartphone sub-segment, Apple has surpassed Microsoft in less than one year. Additionally, Research in Motion through its Blackberry is also obtaining competitive market share to Microsoft.















Considering this set of competitors, and Microsoft’s failure to propel innovation, Microsoft could potentially lose additional market share to its competitors.





Subsequently, based on the historical data concerning Microsoft, it has failed at its priority of satisfying customers and driving innovation. Microsoft based on data, has failed at remaining innovative and maintaining customer satisfaction.





Based on Microsoft’s performance in contrast to its competitors (Apple and Google) numerous shareholders are speculating how Microsoft will succeed in future strategies. Competitors have been able to sustain successive growth and earnings through modest R&D expenditures and new product/service offerings, and yet the largest R&D spending company has failed to remain competitive.





Microsofts largest effort to remain competitive was the poorly conceived and executed bid for Yahoo. This strategy failed to obtain support from numerous Microsoft shareholders. The majority of shareholders are relieved Microsoft abandoned its premium bid to acquire Yahoo. This strategy, if it proved successful,would have cost $45 billion to achieve what a “search” only deal could accomplish.






Microsoft will continue to operate. However, will it continue to languish. Apple in 2004 was trading at approximately $7 per share. Through the leadership of Steve Jobs, the company drove innovation and secured consumers. As a result, the market responded and shares have increased in 2008 to surpass $200 per share. Subsequently, Apple was successful in driving innovation and obtained customer satisfaction. The mac and iphone have obtained market share from vista and Microsoft Mobile. The market has responded, and Apple succeeded in creating shareholder value. This first and foremost is to be the goal of every company. The primary goal of every company management is to create shareholder value. Despite, Microsoft stating in its email that it was a primary goal, it has failed to create shareholder value similar to its competitors.














In 2004, if an investor acquired shares in Microsoft the investment according to historcial charts will have expereinced minimal return with the share value remaining at approximately $25 per share. Therefore, the investor will have realized "NO" return, unless the investor sold in February 2008 when Microsoft rallied to approximately $40 per share. However, if the investor failed to sell during that minor rally, the portfolio will currently be expereincing a negative return.





If an investor in 2004 acquired Apple shares at $7 per share, charts indicate that the investment would have increased to $210 per share in February 2008. Simple math demonstrates that equates to a gain of $203 per share. The comparasion between Microsoft and Apple is simple. An investor in 2004 could have spent $25 per share for Microsoft stock and expereince it increase to $40 per share in February 2008. The alternative, the investor could have spent $7 per share to acquire Apple stock and within the same period witness the shares valued at $210 in February 2008.





The reality is simple to determine. In 2004 the entry level was $25 per share for Microsoft. Currently, the Microsoft shares are trading below the entry level at approximately $18-19 per share based on market fluctuation. In 2004, the entry price for Apple was $7 per share. It with current market volatility has declined to approximately $90 per share. It is still simple to determine that Microsoft has produced a negative impact while apple is worth 12 times higher than the entry price. Apple is a gain of $83 per share.



In 2004 the market valued Microsoft shares at $25 per share. In 2004, the market valued Apple at $7 per share. Based on current market volatility Microsoft has declined to below 2004 levels. Therefore, logically we would have to draw the conclusion that Apple would expereince similar reaction from the market. However, Apple trades well above its 2004 share valuation. An individual that invested in 2004 to acquire shares of Apple would have regardless of market volatility expereinced a substantial gain. This creates the question, what is truly volatile the market or Microsoft?



In the next four years, what will the historical charts of Microsoft’s shares appear or reflect?


From 2004 to 2008 it has fluctuated at $25 per share. As outlined in the data it is losing market share to competitors. This includes losing market share in its valuable Operating System monopoly. It has begun to already loss share in this sector. Being proactive and looking forward, in four years during 2012, what will be Microsoft’s market share in Operating Systems, online services, home entertainment and mobile services?





Although the company has experienced an increase in revenue, without a “New Strategy” will shareholders in the future witness that revenue growth erode as competitors continue to outpace Microsoft?





3-5 years from now (maximum), growth in the cash cows might diminish, this will dramatically impact the potential for shareholder value. There is the potential for Google, RIM, Apple and other competitors to seize additional market share from Microsoft. There is the potential that if Apple continues with similar success, Microsoft will witness its 90% operating system market share diminish further.






All of this assumes Ballmer is still at the helm of course, which sadly and ironically is very probable. Despite, poor performance during his tenure, he continues to preside over the strategic direction and ultimately the fate of shareholder value. What is perplexing is that activist hedge funds target other companies that have languished for equal or shorter durations.
Carl Icahn has acquired numerous shares of Yahoo. Reports indicate that Icahn Partners recently acquired an additional 7 million Yahoo shares. Articles indicate that Icahn Partners were dissatisfied with Jerry Yang and Yahoo. Numerous media articles state that Mr. Icahn was instrumental in supporting Microsoft bid and the proposed acquisition of Yahoo. The activist fund is willing to discuss with Mr. Ballmer the benefits of a 65% premium bid for Yahoo. It’s ludicrous that this activist fund would rally support behind a $45 billion, 65% premium bid for Yahoo and believe that it’s a viable strategy for Microsoft.





What’s confusing is that activists have failed to target Microsoft. Through our initial research we discovered some hedge funds that in August 2008 held Microsoft stakes, however, in their November SEC filings they had liquidated holdings. Liquidating shares has no effect on the direction of the company other than potentially forcing shares further down as its creates more volatility and pressure on other investors portfolios.




Under a Ballmer-led administration, expect more of the same results. Expect more lack of innovation and consumer satisfaction. Expect continued poor share performance and creation of shareholder value. Expect Mr. Ballmer to pursue similar strategies.





According to the email that we received, Mr.Ballmer intends to continue with the strategy of deploying billions of dollars worth of capital towards stock buybacks. Despite this strategy and its failure to elevate the share price, Mr.Ballmer makes it clear it will continue with the same course of action. That strategy appears ridiculously redundant. If you were in a boat paddling towards a waterfall, perhaps Niagara Falls, and realized it was getting closer, would you continue in the same pursuit of action or would you attempt an alternative strategy?















Another analogy, if you were the Captain of the Titanic and were warned of the ensuing iceberg would you attempt evasive action?





As the Captain, would you turn the wheel and put the propellers in reverse to avoid the collision?




Icahn Partners in a letter to Yahoo shareholders stated “the company is moving towards a precipice”. Microsoft based on losing its grip on the PC market, poor performance in online services, poor performance of mobile services, is subsequently moving towards a precipice. However, reflected in the email that we obtained, Mr.Ballmer is adamant on continuing to paddle the boat towards the waterfall as opposed to seeking a “New Strategy”and, is as the “Captain” stating 'throttles full ahead' to accelerate the pace we hit the iceberg. It’s time Mr. Ballmer realize it's time to stop paddling in the same direction and it’s time to reduce throttle before shareholders are either taken over the waterfall or hit the iceberg at full throttle.




It’s time to stop deploying capital towards stock buybacks. In the next four years will Microsoft spend another $115 billion with the same failing results to elevate shareholder value?



Without a rally of shareholders and a “New Strategy", Mr. Ballmer and current management will continue with a general lack of accountability and urgency within the senior management ranks, a lethargic like approach to creating strategic focus on long-term growth and will fail to create shareholder value.




Attempting to protect the cash cows and inadequate attention to the product innovation, and its related failure to spot new trends and get out in front of them (invariably resulting in a desperate, expensive, and often unsuccessful attempt to play catch up later with a 65% and $45 billion bid for another failing company), a staggering annual R&D expenditure that produces minimal technology innovation and even fewer successful new products, poor execution of strategies ( the premium bid for Yahoo), ultimately Microsoft will become its own folly to the detriment of shareholders.



Through the current leadership team and its strategy of creating shareholder value, driving innovation, satisfying customers and pursuing stock buybacks, the reality is within the next four years will Microsoft loose more market share and therefore shareholder value?


The reality is the market sees Microsoft losing its grip on computer users and having nothing to take its place when those users start leaving. There has already been an marginal exodus to mac and Linux, and AT&T with iphone is outpacing Microsoft Mobile. The market is a forward looking mechanism and senses that at Microsoft there's a greater chance of losing market share than gaining market share. Subsequently, the market reflects this fundamental truth in the value that investors are willing to pay for the stock.

Within this analysis we presented a P/E chart that we stated would be discussed in greater detail. Typically, stocks with higher forecast earnings growth will have higher P/E ratios. Those with expected lower earnings growth will have a lower P/E to reflect this expectation.

The company Apple generates $32 billion in annual revenue and has a market capitalisation of $76 billion. The company P/E is currently 16.


The company Google generates $16 billion annually and has a market capitalisation of $93 billion. The company P/E is 18.

Microsoft generates the highest level of annual revenue with $60 billion. It has a market valuation of $170 billion. Its current P/E is 10.

The market is a forward looking mechanism. The market realizes Microsoft is losing its dominant operating system market. The market reflects the expectation of future earnings growth potential and its reflected with the low P/E. The market has demonstrated its belief in Microsoft and the company ability to propel future earnings growth.


Therefore, it can be concluded that despite the fact that Microsoft states “its priority is shareholder value, driving innovation, satisfying and winning customers”, that it’s failing to be successful in these goals. It can also be concluded that it will continue with the same failing strategy. This will be detrimental to current and future shareholders.



It is time that shareholders rally support. It is time that shareholders indicate a “New Strategy”.




The reality, shareholders are in the boat heading towards the waterfall or shareholders are on the Titanic. Regardless of the analogies, it’s time for shareholders to take the initiative and gain control of the boat before shareholders are swept over a waterfall or hit a iceberg.



It is time to take control and rally support. It is time to adopt and execute a “New Strategy” that will avoid future disaster and loss of market share and shareholder value.



As mentioned in previous blogs, we are seeking to rally support for a “New Strategy”. The strategy incorporates three main ideas.




1) Acquire a major bank. We recommend ING. It provides global presence. It offers online services through ING Direct. It enables Microsoft to obtain a valuable asset. It enables Microsoft to increase revenue and offset a potential future decline in revenue through current operations. Microsoft can acquire a major bank that will add according to 2007 reports, $211 billion in annual revenue. This acquisition can with current valuations be achieved by spending approximately $17 billion.




2) Microsoft acquires Sprint Nextel. Microsoft has attempted to gain consumers in this sector. It includes creating an alliance with Sprint. Apple and iphone are gaining market share. The Sprint acquisition enables Microsoft to increase revenue by $40 billion annually. This acquisition at current market valuations would require Microsoft spending $7 billion. This includes offering a modest premium based on current values. Microsoft should not be content with an alliance that provides modest revenue when it has the capacity to acquire Sprint and increase revenue by $40 billion.



3) Microsoft should enter negotiations with Yahoo for a “search” only deal. It can obtain an increase in market share and become competitive with Google. This “search” only deal will cost Microsoft approximately $3-5 billion.



The “New Strategy” enables Microsoft to increase annual revenue to potentially surpass $300 billion annually. It has the capacity to increase net income to $30 billion annually. It enables Microsoft to accelerate growth in both online and mobile sectors. It enables Microsoft to offset the potential decline in revenue based on losing market share in its monopoly Operating System division.



Numerous companies missed the opportunity to accelerate growth during the dotcom meltdown. As mentioned, valuations are at record lows. Microsoft can currently spend less than its proposed Yahoo bid and acquire assets that will add an additional $260 billion in annual revenue.


We will continue to post blogs and rally support. In the New year we will post more information concerning recent developments. We wish all Happy and Safe holidays. We look forward with anticipation to the “New year” and the potential of the “New Strategy”.

Thursday, December 18, 2008

"New Strategy" for Microsoft

We have obtained feedback for our "New Strategy" via email. Therefore, we want to take a opportunity to discuss our rationale for Microsoft entering financial services.

Through research and gathering information it has become evident that numerous shareholders, reporters and analysts believe that Microsoft is languishing in regards to technology. Although we cannot argue that the company has increased revenue, we can however mention it is lossing its hold on the PC market to Apple and to other free services which Microsoft offers customers for a price.

General Electric began initially as a technology company. Although its technology is different from Microsoft, regardless, at the time of its inception it was leading technology. During the tenure of Jack Welch the company expanded into financial services. Through acquisition growth it aggressively entered this sector. Currently, financial services accounts for approximately half of the company's $130 billion in annual revenue. since over half of the company revenue is derived from financial services, it can be argued that GE is a finance company with divisions engaged in manufacturing.


It began by offering its customers credit for heavy equipment purchases. It has become an integral division for General Electric. I am confident that when Mr. Welch announced that a appliance company was going to enter financial services there was opposition and confusion. I will certainly not compare The Crandrea Group to Jack Welch. However, we will draw similarities in that both Microsoft and General Electric were originally technology based companies.


When initially researching for the "New Strategy" and considering the proposition that Microsoft enter financial services, we discovered a company that has been featured through Barron's, BusinessWeek, USA Today, The Wall Street Journal, and the NY York Times, proposed the same idea. This company in their website posted an article which suggested Microsoft enter financial services. This was based on the observation that Microsoft was more reflective of a bank.


The article can be found at Parish and Company called "Taking a Closer look at Microsoft". Parish and Company state :


"As Microsoft matures, however, it could make significant changes in its way of life that are more in keeping with its status as a industrial and financial giant.


Perhaps it should imitate GE. With over $40 billion in cash and investments, Microsoft, is becoming more and more like a bank anyway. Microsoft could expand its scope and aggressively enter the financial services industry , perhaps by purchasing a major bank. Just as GE founded a credit business by financing its customers purchase of heavy electric equipment, Microsoft could base a finance division on its customers purchase of money-managment software and web services".


After reviewing this article it confirmed our ideas that Microsoft could proceed into this sector. Microsoft has the capacity and the ability to emulate GE. It has the ability to offer financial services to consumers and additionally enhance other divisions in the process.



Hypothically, let's suppose that Mr. Welch was confronted with opposition. Executives indicated that it was a poor strategy. Subsequently, GE never entered this sector. General Electric never grew in this sector through acquisition, it never established GE Real Estate. How much value would have been lost?



Would GE remaining in its previous course had the capacity to exceed $100 billion in annual revenue?


Would Mr. Welch had the ability to create in 20 years a company that grew from $30 billion to $130 in annual revenue?


Without entering financial services would Mr. Welch been able to create $400 billion in shareholder value during his tenure?


It is interesting to review that in the 1960's GE was a major manufacturer of computers. It was considered one of the big eight. It was a sector that GE was engaged in maufacturing. However, in 1970, GE sold this division to Honeywell. This demonstrates that companies require the ability and agility to examine its business model and constantly change to meet the demand of trends and economies.


Shareholders, reporters and analysts agree that Mr. Ballmer during his tenure has failed to create value. They also agree that Mr. Ballmer has deployed enormous amounts of capital on stock buy backs which have failed to elevate the shares. They also agree that Microsoft is languishing in innovation, lossing the PC market, lossing search market share to Google, and lossing mobile service to iphone.


If Mr. Ballmer continues with current strategy shareholders will continue to expereince poor performance and massive overspending on ineffective strategies. The reality is how much revenue growth can Microsoft achieve through current strategies and tactics. Will shareholders be subjected to Mr. Ballmer attempting another $45 billion premium bid for a languishing company?


Entering financial services enables Microsoft to create a division that will accelerate revenue and earnings. Numerous other companies have entered this sector proving beneficial. For example, Canadian retailer Loblaws, through PC Financial has established a valuable company division. However, would it have been conceivable that a grocer create a valuable finance division?


Microsoft has the cash flow and resources to accelerate growth through acquisition. Microsoft through its finance division has the ability to offer loans and financing to other companies. It has the ability to use current market conditions to acquire a valuable asset at a discount. It enables Microsoft through financial services create synergy with other divisions. It provides potential to offer services that cross promote other divisions and enhance consumer loyalty. This reality can be demonstrated through PC Financial that offers consumers discounts with mortgages, insurance and groceries. Consumers of PC Financial obtain "Reward" points that can be used to obtain other Loblaws services. Microsoft through a similar concept could offer credit cards to corporate customers that earn points towards Microsoft Mobile and other Microsoft services.


We suggested in our "New Strategy" that Microsoft propel growth of Microsoft Mobile. We suggest that it expand beyond an alliance with Sprint and acquire the company. Our "New Strategy" enables Microsoft to own a bank and provide "reward" points to corporate and individual customers. It enables the corporate client to use the bank credit card and obtain points. These valuable points are used by the consumer towards mobile service or Internet and software service. It creates synergy and value within different Microsoft divisions. It enables Microsoft to offer an attractive service over conventional banks, mobile companies and search companies.


The primary success to retailers offering finance divisions to consumers is the services they obtain. PC Financial enables consumers to use a credit card and obtain free groceries at Loblaws. Consumers will use PC over conventional cards for the added bonus. It creates tremendous value for Loblaws and PC Financial. Subsequently, Microsoft has the potential to emulate GE and acquire a major bank and through the process offer consumers an additional service that will enhance other Microsoft divisions.


The company Time Warner, which has merged with AOL is considered a conglomerate. It operates a diverse portfolio of companies. However, these properties are also linked, such as, Internet access and Internet content. Their diverse portfolio of assets provide the company with the ability for cross-promotion and economies of scale.


Our "New Strategy" involves Microsoft emulating GE. It involves the company entering into financial services. It provides the company the ability to expereince growth with this sector. It enables the company a similar tactic as Time Warner. Microsoft through our "New Strategy" has the ability to utilize its assets through cross-promotion. It enables the company to cross-promote financial services with finance and managment software. The finance division can be cross-promoted with mobile services or Internet services. The company has the ability to cross -promote and the assests will enhance the value of each division of operation.


Microsoft has the potential to emulate GE. It has the ability to become a financial and technology company. It has the ability to essentially become a finance company with technology or manufacturing divisions. This strategy provides the opportunity for the finance division to enhance the revenue and value of other sectors of operation. Therefore, ultimately, the "New Strategy" has the ability to enhance brand awareness and consumer loyalty.


Our "New Strategy" enables Microsoft to propel revenue and earning's growth and increase its product mix. The acquisition of assets and involment in finance enables the company to offer the commercial or consumer multiple services. The individual consumer can obtain loans, mortgages, Internet, mobile and home entertainment from the same company. The individual consumer will use the finance division to qualify for "rewards" with other services.

The commercial customer can use credit cards, loans, financing, and also obtain mobile services, software, Internet access and services. The commercial customer has the potential to use a credit card from Microsoft and obtain points or "rewards" towards securing mobile service for its employees.


We have outlined a "New Strategy" for Microsoft. We do not have all the definitive answers. However, we offer shareholders a "New Strategy" and a forum to offer feedback and rally support. The reality is, without rallying support and creating a "New Strategy" where will Mr. Ballmer lead the company and how much value will be created for current and future shareholders.


We have additional information and ideas concerning the financial portion of the "New Strategy". We have recently through our posts provided a brief synopsis of the "New Strategy". We are through blogs limited to the quantity of information that can be posted.


We want to thank those that have been reponding via email. We are aware that there are numerous frustrated shareholders. However, the resolve is NOT to sell shares BUT rather rally support to effect change.


We are confident that we can continue to rally support from frustrated shareholders and effect change that will establish lasting value for shareholders.


We can be contacted via email at thecrandreagroup@hotmail.com

Friday, December 12, 2008

"New Strategy" with or without Yahoo?

There has been recently increased pressure from Yahoo shareholders to address negotiations with Microsoft. Reports indicate that Icahn Partners recently acquired 7 million more shares of Yahoo. This reflects Icahn's intention to maxamize a return on the Yahoo investment. Carl Icahn has through CNBC announced "Yahoo is still undervalued".

According to CBS Marketwatch, another hedge fund, Los Angeles based Ivory Investment which owns 21 million shares are seeking Yahoo to enter a deal with Microsoft. The hedge fund values Yahoo search business at approximately $15 billion.

Recently, Jeff Lindsay, an analyst with Sandford Bernstein stated that Yahoo search business was not worth any more than $3-$5 billion. This statement was endorsed by analyst Mark May of Needham and Company which stated "Ivory's $15 billion evaluation is to high considering Microsoft's previous $1 billion offer".

Both Icahn Partners and Ivory Investment have large stakes in Yahoo. However, both firms only want to see the value of Yahoo increase so a profit will be realized for the funds. The question is, is it the "best" strategy for both companies?

The answer according to shareholders, analysts and reporters has subsequently been "NO".
Additionally, Mr. Ballmer has stated that Microsoft has resolved all negotiations with Yahoo. However, both Icahn Partners and Ivory with large Yahoo stakes are going to seek to rally support and force a Yahoo and Microsoft negotiation. This strategy according to shareholders, reporters and analysts will be detrimental to both companies rather than beneficial.

Therefore, it is imparative that Microsoft shareholders rally support and effect a "New Strategy" before Icahn Partners and Ivory Investments pressure Yahoo to sell to Microsoft for a premium price. This will fail to create true value for Microsoft shareholders.

Microsoft was originally seeking to spend $45 billion to acquire Yahoo. This price was a 65% premium. Icahn Partners believes that Yahoo is currently undervalued. Carl Icahn has been in dicusssions with Mr. Ballmer in the past. Therefore, there is the potential for Mr. Icahn to approach Microsoft to reopen negotiations. This will fail to create shareholder value for Microsoft.

During Icahn Partners bid for Yahoo, reports indicated that 11 of the 20 largest institutional shareholders owned stock in both companies. Firms such as CRM, State Street and Vanguard own hundreds of millions of Microsoft shares. Recently, SEC filings indicate CRM owns 280 million Microsoft shares. Therefore, CRM and other large shareholders want a strategy that will benefit both their Yahoo and Microsoft holdings.

We have developed a proposal called a "New Strategy". We are seeking to rally support. In our blog we have stated that we are seeking a tactic similar to Ironfire Capital and its use of the Internet to rally support to effect change at Yahoo. We have also stated that we are seeking to use a tactic similar to Pershing Square to effect change at McDonalds. Pershing Square created a presentation and invited shareholders, reporters and analysts. We are arranging a presentation which will hopefully include reporters, shareholders and large insitutional shareholders, such as CRM.

Our "New Strategy" outlined a proposal that will enable Microsoft to utilize current market conditions to accelerate growth. Sir Branson of Virgin Group during a CNBC interview stated that current volatility enables companies with strong financial balance sheets to emerge larger and stronger. Additionally, the CEO of Broadcom announced through CNBC the company intention to pursue acquisiton during current market conditions.

Our proposal incorporated strategies that enables Microsoft to deploy less capital then its bid for Yahoo. Our strategy enables Microsoft to acquire two companies at approximately $30-35 billion based on current valuations. Subsequently, this is $10 billion less than its Yahoo bid.
The Yahoo bid will have increased Microsoft annual revenue from $60 billion to $67 billion. It will have increased net income from $17 billion to $17.6 billion.

Our "New Strategy" involves acquiring two companies. We propose it acquire a major bank and enter finanical services. We suggested it acquire ING. This is a global company. Through 2005, 2006, 2007 the company has experienced an increase in revenue growth. The company according to 2007 reports generated $211 billion in revenue and $14 billion net income. Similar to other companies it is trading at record levels. We stated that this will correct and ING will increase in value. Since starting this effort of rallying support, ING share price has risen. When we started research one month ago ING was valued at $16 billion. It is currently valued at $20. Hypothetically, had Microsoft acquired the company when first mentioned, it could have potentially realized a $4 billion gain on acquisition.

We also recomend that Microsoft acquire a handheld company to propel growth into this growing sector. Currently, Microsoft operates Microsoft Mobile. We suggest that it acquire Sprint Nextel. According to 2007 reports, this company generated $40 billion in revenue.

Microsoft through these acquisitions will create a company that through combined operations generate approximately $320 billion in annual revenue. It will also enable the company to generate approximately $30 billion in net income.

This "New Strategy" enables Microsoft to enter financial services. It enables the company to provide lines of credit, mortgages and other financing to companies. It creates synergy with our proposal for Microsoft to eventually acquire commercial real estate. It will enable the company to provide several financial services to companies. It also enables Microsoft to become one of the worlds largest financial companies.

The "New Strategy" enables Microsoft to accelerate growth into the handheld sector with the acquisition of Sprint. This will enable Microsoft to control the third largest wireless company. It will enable Microsoft to acclerate into wireless services. It also provides Microsoft with $40 billion in additional annual revenue. This company can currently be acquired for approximately $7 billion.

However, the question that remains is what about Yahoo. This is a languishing company. Historically, Netscape was eliminated by new technology. AOL proved almost worthless to Time Warner. Now, Yahoo which was once a Wall Street darling is heading towards a precipice. However, numerous shareholders, reporters and analysts state that Microsoft acquiring Yahoo would prove to be a "poor strategy".

We suggest that Microsoft pursue acquiring a search deal. Mr. Ballmer has indicated this potential. However, Mr. Ballmer has also failed to articulate positive and definitive strategy for the company. It is possible Mr. Ballmer could be pressured or persuaded by Icahn Partners to acquire all of Yahoo. This would be a waste of Microsoft capital and would fail at creating lasting value.

We suggest it pursue a "search" only deal. As mentioned, it would enable Microsoft to acquire an asset for approximately $3-5 billion. This deal will be more benefical to both companies. It would enable Microsoft to become competitive with Google. It would enable Yahoo to obtain a cash injection and potential annual cash flow.

Through our "New Strategy" based on current valuations Microsoft can deploy $20 billion to acquire ING. It can spend $7 billion to acquire Sprint. It can spend $3-5 billion to acquire the search deal with Yahoo. If Microsoft offers a modest premium for all three assets it will still ultimately spend less than its Yahoo bid of $45 billion. The "New Strategy" will create a company that has $320 billion in annual revenue, $30 billion in net income, and compeitive in both wireless and search sectors.

We are seeking to rally support. We are asking that Microsoft shareholders rally support to effect a "New Strategy". It is imparative to rally support before Icahn Partners or Ivory Investment through the media influence a entire sale of Yahoo to Microsoft. This strategy will fail to offer similar value as our "New Strategy"

We can be contacted at thecrandreagroup@hotmail.com

Wednesday, December 10, 2008

"New Strategy" for Microsoft

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.

We can be contacted at thecrandreagroup@hotmail.com

Monday, December 8, 2008

Microsoft requires New Plan

Shareholder activism has grown substantially in its influence. For numerous years shareholders where required to idly observe management execute poor strategies and expereince poor performance. However, through shareholder activism hedge funds and individual shareholders are effecting change at poor performing companies.
In 2004 Steven Ballmer, the CEO of Microsoft announced a strategy of utilizing cash for stock buybacks. Microsoft according to Investor Relations has deployed $115 billion in stock buybacks. Despite this massive spending, Microsoft shares have continued to languish.
In 2008, Mr. Ballmer offered a 65% premium valued at $45 billion to acquire Yahoo. An analyst with Goldman Sachs stated this was perhaps Microsoft's most stupid move in its history. Numerous Microsoft shareholders where oppossed to this strategy. Mr. Ballmer has lost shareholders confidence.
During Mr. Ballmers tenure he has engaged in massive overspending, poor execution of strategy and has failed to articulate to shareholders a long term plan. Mr. Ballmer has indicated intentions to continue deploying tremendous amounts of capital towards stock buybacks.
It is imparative that Microsoft examine its strategy and adopt a new proposal. Failure to adopt a new proposal will result in the share price continuing to languish.
We have created a "New Strategy" for Microsoft. The strategy involves utilizing its cash and net income to accelerate growth. The company is currently limited with its growth capacity within the PC and software market. Our "New Strategy" incorporates expanding into new markets to propel growth and shareholder value.
Our "New Strategy" involves deploying less then Microsoft's proposed $45 billion to acquire Yahoo. Our "New Strategy" involves Microsoft deploying approximately $30-35 billion to acquire two companies. The strategy will enable Microsoft to acquire two companies that according to 2007 reports generated a combined $260 billion in revenue. Microsoft can deploy less than its Yahoo bid and acquire companies that will enable Microsoft through combined operations generate over $300 billion in annual revenue and approximately $30 billion in net income.
It is imparative that Microsoft adopt a "New Strategy". We are currently seeking to rally support from frustrated shareholders to effect change. Microsoft has $25 billion in cash and generates $17 billion in net income. However, for "long-term" it has failed to create shareholder value. It is time that shareholders take action and demand a "New Strategy" that will create vision and shareholder value.
If you are a Microsoft shareholder and are frustrated with Mr. Ballmer and Microsoft's poor performance, we are seeking your support. Shareholders through activism have the ability to effect change. Now is the time to effect change at Microsoft.
We can be contacted at thecrandreagroup@hotmail.com.