Tuesday, January 27, 2009

Microsoft SubNet "New Strategy" Interview

In our last December 2008 post, we stated that there was a development that had the potential to accelerate the 'New Strategy' campaign. In mid-December we initiated conversations with a editor of media asset to conduct a interview. We recently concluded an interview and have subsequently posted the interview within this post.

We want to thank the hard work and dedication of Microsoft SubNet. We also want to thank Julie Bort for conducting this interview.

Microsoft SubNet (question):

Who are you and what is your relationship to Microsoft?
(Do you work for the company, or used to work for the company? Do you own shares? Would you reveal how many -- or even right around how many?)

The Crandrea Group (answer):

Currently, there is no direct relationship to Microsoft. We began analyzing and researching the company shortly after Mr. Gates announcing resignation. We began researching historical share data and began writing letters to Mr. Gates. Eventually, those letters were directed to Mr. Ballmer ultimately leading to this “New Strategy” campaign.

In essence the number of shares owned is inconsequential. Management of companies have a obligation or duty to listen to shareholders but also maximize shareholder value. Historically, the misconception by numerous companies and their management is that they are only accountable to large institutional shareholders with substantial equity stakes. Management would typically ignore smaller shareholders. However, the reality, management is equally accountable to the small shareholder with $100 invested as they are to large firms with millions of shares. Perhaps this is the reason shareholder activism has increased in popularity.

Until recently, the investor of a poor performing company would stir up tension or pressure on management at an annual meeting, or led a no-confidence vote. Typically, the small investor and their concerns would go unrecognized by management.

Shareholder activism is becoming more prevalent and influential. Previously, frustrated shareholders felt the only recourse was to sell shares in a poor performing company. However, shareholder activism has gained support primarily based on small shareholders recognizing that selling shares, often at a loss, to protest or as a result of years of frustration, does nothing to effect strategy and influence management. It simply creates pressure on another investors portfolio as the company continues to underperform.

Activism is providing small investors with confidence that the only recourse is not selling shares, but, activism enables shareholders the opportunity to remind managers or executives to account for shareholders interest regardless of the number of shares owned.

Activists have engaged in various tactics to effect change. Daniel Loeb of Third Point is notorious for letters to CEO’s of poor performing companies. Carl Icahn of Icahn Partners has taken out full page ads in national newspapers to rally support. William Ackman of Pershing Square created a PowerPoint presentation and invited analysts, shareholders and reporters to the conference.

Ironfire Capital created a “Plan B” for Yahoo. Despite owning less than 100 shares, Ironfire Capital created a blog, wiki’s and a youtube campaign. The company through using the Internet was able to rally support from numerous frustrated Yahoo shareholders. This campaign demonstrated that shareholders of a poor performing company will rally support towards a valid credible idea for the company regardless of the number of shares owned by the originator of the “PlanB” or “New Strategy”

We have essentially created a tactic for activism that will integrate components from Pershing Square and its campaign for McDonalds and also Ironfire Capital with its campaign for Yahoo. We in mid-December after forwarding letters to Mr. Ballmer created a blog to rally support. We intend to utilize the Internet and rally support for an alternative strategy. We will also be creating a youtube post to attract additional attention to the campaign. Lastly, we are considering establishing a PowerPoint presentation that allows shareholders, analysts and reporters to attend.

Microsoft SubNet (question):

How long have you been a shareholder?

The Crandrea Group (answer):

I think that this seems to allude to the previous question. At this juncture we will briefly reiterate the notion that the amount of shares is not relevant. Regardless of whether it is a hedge fund with 10 million shares or a individual firm such as Ironfire Capital with 100 shares, frustrated shareholders should have the opportunity to shareholder activism and a resource to effect change at a poor performing company.

The number of shares does not certify or negate the idea. Subsequently, a large firm with substantial holdings has the ability to present a idea or plan that will fail to create value for the shareholder. Conversely, as demonstrated by Ironfire Capital a firm with a minimal holding can rally support if the idea presents an alternative from current management strategies, and the idea has the capacity to create true shareholder value.

Microsoft SubNet (question):

Why did you buy Microsoft stock?

The Crandrea Group (answer):

While conducting research, we discovered a activist hedge fund that we have previously mentioned in the interview, in May 2008, lists owning 6 million shares of Microsoft. In August 2008, the hedge fund lists owning 6 million shares of Microsoft valued at approximately $180 million. However, by November 2008 the fund fails to list any holdings. Therefore, it appears the fund acquired shares in Microsoft during the bid for Yahoo. However, after the failure of the bid, the fund sold its entire Microsoft holding. This is a multi-billion dollar hedge fund selling its shares in Microsoft. Perhaps it sold because it failed to have confidence that Microsoft management would have created shareholder value.

During a 2004 Annual shareholder meeting Microsoft is presented with the question of explaining the share price. Its recognized that the company is not a growth stock.
The company CFO states "we have been in a stagnant, narrow range for a while" and Mr. Ballmer states " if things go according to plan the stock will take care of itself".

These statements are extracted from a 2004 annual shareholder meeting. Both the company CFO and CEO acknowledge that the shares have been flat for "FOUR YEARS". However, the response is that "if things go according to plan the stock will take care of itself".

Without fully evading the question I will mention an article, according to a report within the New York Times, in 2005 Mr. Ballmer stated that he had trouble selling the long term value of Microsoft even to the company’s own employees. The article indicates that he stated “ Are you buying our stock?” to a team of Microsoft executives, “All the hands were down”.

Since 2004 and the annual shareholder meeting the shares have remained relatively flat with minimal variation. There has been no real evident historical increase in share price during 2004 to 2008. Therefore, we are confident that if Mr. Ballmer asked a current team of Microsoft executives if they are buying shares, it would receive a similar response as to 2005. We are certain that all executive hands would be down, and therefore, Microsoft executives are most likely not confident to acquire shares in the company.

These facts are which have caused the creation of a “New Strategy” for Microsoft. The company has deployed $40 billion on share buybacks, it has engaged in massive R&D, it has pursued numerous acquisitions including the proposed 65% premium bid for Yahoo and have in total returned $115 billion in share buybacks and dividends.

For a period of eight years the company shares have been stagnant and within the narrow range. Despite management and its “strategy”, the shares have failed to create value. Perhaps this is why Wall Street refers to the company as a utility.

These former strategies presented characteristics that required activism and a “New Strategy” to create share holder value.

Microsoft SubNet (question):

In your opinion, besides Apple, what companies compare to Microsoft to indicate that Microsoft stock is underperforming in the same period? (Oracle? IBM? CA? Symantec? Google?)

The Crandrea Group (answer):

You ask besides Apple what companies compare to Microsoft to indicate that its underperforming. It is necessary however to briefly discuss Apple. In 2004, the company shares were trading at approximately $7 per share. By the end of 2007 the shares were trading at approximately $210 per share. Despite the current market volatility it still trades at $90 per share. This subsequently equates to an increase over four years of 1,200%. Therefore, this is a tremendous return to investors. This return is based on the current market and the shares trading at $90 per share instead of comparing returns when the shares were trading at $210.

However, based on the question we will examine other companies and there share performance within the same period. Oracle in 2004 was trading at approximately $14 per share. Prior to the market volatility of 2008 the shares where trading at $24 per share. Within that period the shares primarily display an upward momentum. Therefore prior to the downward trend of the market, Oracle increased shareholder value by 58%.

You mention Symantec, it has demonstrated a decline, however, you also reference IBM. This particular company in 2004 was trading at $100 per share. Prior to 2008 the shares where trading at approximately $135 per share.

The software company SAP AG during 2004 was trading at $40 per share. It has displayed more movement than Oracle, however, prior to the market volatility it was trading at $60 per share. This reflects a return of 66% within the four year period.

However, Microsoft in 2004 was trading at approximately $25 per share. During the four year period there is minimal variation. There is a minor rally during the start of 2008 during the initial announcement of the Yahoo bid, however, there is then a exodus of shares being sold and a subsequent downward trend. Since the Yahoo bid, the shares have remained in a downward trend. The rally occurs for approximately 3 months and increases to approximately $40 per share. Despite this minor rally, the shares for a four year period remained at approximately the same level of $25 per share.

To further examine Microsoft, after the dot-com melt down Microsoft shares went from a high of $60 per share to a level of $25 per share. The company grew revenue and earnings, we will not argue this reality, however, despite the growth the shares remain flat. Typically, if a company was experiencing double-digit growth it would be reflected in the stock price. However, Wall Street and the typical investor has not witnessed the price moving towards $60 per share. This is the level that the shares should be trading, however, despite growth, despite dividends, despite buybacks, it has failed to elevate the share price.

Microsoft SubNet(question):

You note Microsoft's failed attempt to buy Yahoo as a poor decision regarding how to spend its capital. That deal didn't actually go through, as we all know, but what are your thoughts on other Microsoft acquisitions over the past few years? Tellme (2007), for instance, seems particularly promising as does DATAllegro in 2008.
What kinds of technologies would you like to see Microsoft buy?What do you think the problem is between buying a promising technology and showing Wall Street how that buy indicates growth potential?

The Crandrea Group(answer):

The Yahoo bid failed to display any real rational planning. According to reports, in an annual analysts meeting during mid 2007, Mr. Liddell and Mr. Ballmer inform analysts there is no intention of Microsoft acquiring Yahoo. Microsoft management state they are “organic-minded”. Management during this meeting with analysts indicated that there wouldn’t be a large acquisition within the online sector. However, less than one year after the announcement at the analyst meeting ,Microsoft introduces a bid for Yahoo.

Perhaps the most perplexing issue, regardless of the rapid change in strategy, the company offered a 65% premium bid for Yahoo valued at $45 billion. First it demonstrates a company uncertain of its own strategy. To change direction and pursue a strategy that you initially stated wouldn’t happen, displays characteristics of a company uncertain of its own long-term strategy. Secondly, it offers a 65% premium for a company that it previously stated it would not acquire. The bid equated to $45 billion for a floundering company. This is perhaps the reason that charts display a massive sell-off with Microsoft shares after this announcement. Numerous shareholders felt it was a massive expenditure that would fail to create shareholder value.

In regards to other acquisitions it’s difficult to forecast the value of the acquisition and how that will translate into revenue growth for the company. You mention the acquisition TellMe. According to reports, Microsoft acquired this particular company in 2007 for $800 million. It is interesting to note that prior to the acquisition there were rumors that in 2006 Google was seeking to acquire TellMe.

With TellMe, perhaps Microsoft intends to use it for competing with Google. There is the potential that Microsoft intends to use TellMe mobile search ability, with voice recognition mobile users may have the ability for speech queries. Maybe Microsoft intends to use it to create a competitive SaaS communications service. The difficulty is determining, if Microsoft will be successful in using that $800 million acquisition to create market share and revenue growth.

In 2001, Microsoft spent approximately $1 billion to acquire Great Plains Software. This acquisition was to compliment the Microsoft Business Solution division. According to Microsoft Annual Reports, in 2002 this division had revenue of $300 million.

In 2002, Microsoft spends $1.4 billion to acquire Navision. According to Annual Reports this translates into annual revenue in 2003 amounting to $567 million. By 2004 this division included Microsoft Great Plains, Microsoft Navision, Microsoft CRM, Microsoft Axapta and Microsoft Solomon. The entire division generated annual revenue in 2004 amounting to $667 million. This revenue growth is based on Microsoft spending over $2 billion to acquire both Great Plains and Navision. It also incorporates Microsoft spending $5.2 billion on R&D in 2001.

It spent in 2002 $5.8 billion on R&D. In 2003 the company spent $6.4 billion on R&D. Despite this massive spending it translates into increasing revenue in this division by $300 million.
Perhaps this is the underlying dilemma with Microsoft. Historically it is engaged in numerous acquisitions within each fiscal period. However, it is difficult to ascertain how each acquisition compliments current Microsoft operations, increases market share and creates revenue growth. Microsoft engages in numerous acquisitions annually to acquire companies to enhance each Microsoft division. It acquires companies for Microsoft Business, Online Services, and mobile services.

Since 2002, Microsoft has deployed approximately $12 billion on numerous acquisitions for each division of operation. In 2002 the company had annual revenue of $28 billion. In 2007 Microsoft generated $51 billion in revenue. One could argue that the company within this period experienced double-digit growth. However, from 2002 to 2008 revenue grew by $23 billion. We could argue that the company almost doubled revenue. However, in this period it spent a minimum of $12 billion on acquisitions. That means the acquisitions combined only added $11 billion in revenue. This fails to equate the massive R&D expenditures within the same period.

Therefore, its difficult to interpret how much each acquisition will benefit Microsoft. Based on the deployment of capital it fails to translate into stellar growth.

We are not opposed to Microsoft acquiring technology. However, the historical dilemma with this strategy is the inability to translate the technology into market share, revenue growth and shareholder value. If we look at the amount of R&D deployed to improving online services and the number of acquisitions in this sector, such as search technology, the company has displayed very minimal revenue growth.

It is common knowledge that Mr. Gates is friends with Warren Buffet, The Sage of Omaha. During a annual meeting Mr. Buffet once commented that Berkshire’s $30 billion in cash was a inefficient utilization of capital. Microsoft currently has $25 billion in cash. It also generates $20 billion in net income. Microsoft in 2004 stated that it was going to engage in share buybacks. It has recently announced a similar strategy of deploying $40 billion through to 2013 on share buybacks. We believe that this is waste of capital.

Instead of acquiring technology that will provide incremental growth or instead of pursuing share buybacks, our “New Strategy” involves acquiring companies that will enhance revenue. We don’t feel that Microsoft should be content with pursuing acquisition of technology companies within the mobile services sector that might enhance revenue, and might increase market share , when the company has the ability to acquire a mobile company.

Within our blog we make reference to an article that refers to Google acquiring Sprint. This would have the capacity to enable Google to rapidly secure a substantial market share with mobile services. Microsoft has historically pursued various alliances including Sprint. Microsoft has the capital resources to acquire the company. Rather than being content with alliances it should acquire a major mobile services company. This would create tremendous revenue growth. It would create cross-promotion synergies and increase the company brand. Therefore our strategy involves diverting capital from technology acquisitions and acquiring companies that enable Microsoft to use existing technology and products to enhance brand awareness.

Microsoft SubNet (questions):

Do you advocate the restructuring of Microsoft's top offices such as getting rid of Steve Ballmer or Kevin Turner? Why or why not?

The Crandrea Group (answer):

Typically, I believe that activists prefer to work in conjunction with management to enhance shareholder value. However, there has been occasions when the activist campaign has sought the resignation of management.

We are aware that Relational Investors influenced the resignation of the CEO of Home Depot. We are also aware that Ironfire Capital was seeking the resignation of Terry Semel.

As mentioned, we initially began forwarding letters to Mr. Gates stating that as company founder and Chairman it was imperative to ensure that shareholder value was created before his final resignation. We stated that the company required a “New Strategy” before his retirement. However, each letter was dismissed.

This resulted in letters being forwarded to Mr. Ballmer. We were in essence following a tactic similar to Daniel Loeb of Third Point and were forwarding letters to the CEO. However, each of these letters where dismissed leading eventually to our email from Investor Relations.

Now we understand that Mr. Ballmer as with many CEO’s is busy. However, hypothetically, if a fund manager of a company such as Fidelity forwarded a letter to Mr. Ballmer and cited certain issues, there is a high probability that it would translate into a phone discussion. We appreciate; that CEO’s cannot respond to every shareholder concern, however, as mentioned this is perhaps the reason activism is gaining in popularity. CEO’s seem to only respond to concerns from large institutional shareholders. However, the individual that has taken their retirement and invested into a company is disregarded and they are forced to watch their nest egg diminish in value.

Based on the history of Microsoft and its inability through current management to create shareholder value, we certainly have concerns with current management and Mr. Ballmer. We have to agree with a former article by NetworkWorld concerning Mr. McDonald. He notes that a company with 90% of the operating system market share should be able to enhance shareholder value.

As acknowledged by Mr. Connors and Mr. Ballmer the shares have for long-term been stagnant. The company management has failed to create any long-term shareholder value. Based on this fact, we have to state that Mr. Ballmer should be replaced by a CEO that will create value.

We have to concur with Mr.McDonald when he states that Microsoft requires new leadership that will inject strategy and increase brand awareness. Based on reports and data, Mr. Ballmer has failed to accomplish this task. Mr. Ballmer has failed to articulate strategy to shareholders and analysts. He has also failed to elevate shareholder value. During his tenure he has presided over massive spending, poor decisions and ineffective execution of plans to create shareholder value. Despite stating at a 2004 annual meeting that the success of the company strategy will ensure the shares will take care of itself, shareholders have failed to witness a return. Therefore, after eight years of poor share performance, it is time for a new CEO.

Microsoft SubNet (question):

Microsoft committed to spend $7.5 billion in R&D overall in 2006 (not sure the 2008/2009 numbers) with Windows Live (its cloud computing initiative) being a major target for those funds and MSN another target. Microsoft has unveiled lots of online services, many of them competitors to other services that exist, and a few original ones. But without a strong advertising base, or without being able to convert its software buyers into service subscription buyers, it has limited avenues to profit from these new services. Wouldn't it make sense, then to directly try and build out an ad base? Where is Microsoft failing in this strategy and what would you suggest it do to fix that?
(You say, based on input from your MS developer source that Microsoft is squandering its R&D funds mostly on ineffective management of people/salaries.)

The Crandrea Group (answer):

During 2007, Apple spent $782 million on R&D, Oracle spent $85 million while Microsoft spent $8 billion. In 2007, Apple annual revenue amounted to $24 billion and net income totaled $3.5 billion. According to 2008 Annual Report, Apple increased revenue to $32 billion and net income to $4.8 billion. During the same period Microsoft spent $8 billion on R&D and increased revenue from $51 billion to $60 billion. Therefore, Apple has a R&D budget that equates to approximately 10% of Microsoft’s, however, during this period Apple increases revenue by $8 billion and Microsoft increases revenue by $9 billion.

However, if we look at the online sector, Google in 2005 and 2006 spent approximately $1 billion annually on R&D. In 2007, the company increased R&D to approximately $2 billion.
In 2005, Google had online advertising revenue of approximately $6 billion. In 2007, advertising revenue has increased to $16 billion. In the same period, market share has increased from approximately 30% to exceed 50% currently.

As you mentioned, in 2007 Microsoft spent $7.5 billion on R&D. In both 2005 and 2006 the company spent approximately $6.5 billion in each period.

In 2005, Microsoft generated online advertising revenue of $1.5 billion. In 2007, Microsoft reported revenue of $2 billion.

In 2005, Microsoft controlled 8% of the market share. In 2007, it appears that it had declined to approximately 6% market share.

Despite a larger R&D budget, Microsoft has failed at increasing annual revenue and obtaining market share. Google within this period has increased revenue by $10 billion and increased market share by 20%. However, within the same period, Microsoft has increased revenue by $500 million and potentially has lost 2% market share.

Yahoo within the same period has been able to increase advertising revenue from $4.5 billion to $6.5 billion in 2007. However, it has lost minor market share to Google, and currently controls approximately 20%.

Online advertising amounted to approximately 5% of Microsoft’s 2007 annual revenue. Therefore, compared to operating systems it is still a small contributor to overall company revenue generation.

Google according to reports controls approximately 60% of the search market. Therefore, currently Microsoft is failing to compete within this category.

As we mentioned earlier, Microsoft has deployed billion towards R&D in this sector. It has pursued numerous acquisitions including Motionbridge, Medstory and jellyfish. Most recently it acquired Fast Search and Transfer for over $1 billion.

It also acquired Onfolio which was integrated into the Windows Live tollbar. However, by 2008 Microsoft announced that this was discontinued.

Perhaps the solution is very simplistic yet the most logical. For several years the Detroit Big experienced the luxury of revenue growth and everyone in North America and globally wanted their products. However, eventually they began to experience this decline in consumer demand and revenue. The Big 3 were losing market share to companies such as Honda and Toyota. I believe that it was Ford that discovered the solution. They created an initiative of asking customers what they wanted. They compiled information and began to make products the way consumers suggested. Rather than taking the approach of introducing a product and forcing the customer to accept it or go to a competitor, the company started a strategy of “here is what the customer requested” and here is the product.

When we began our research we found comments on blogs from Microsoft employees. They stated that money is wasted on R&D through process but also that the company is essentially having a mentality of telling the customer the products and services the company has created in its R&D labs.

Microsoft has pursued R&D and acquisitions in an attempt to remain competitive. However, as mentioned, despite these initiatives Google has increased advertising revenue and obtained more search market share. Metaphorically, Google is to Microsoft what Toyota was to Ford.
Microsoft needs to stop telling the company what it wants and start asking what the customer wants. It is very ironic and yet a very sad commentary that Microsoft is a company that sells CRM software to clients. CRM software is designed to build lasting customer relationships and translate satisfaction into customer loyalty. Therefore, Microsoft offers Microsoft Dynamics CRM to clients, however, Microsoft’s largest detrimental dilemma is its lack of ability to create relationships with its consumers and translate customer relationships into satisfaction and ultimately into customer loyalty.

It is common knowledge that Microsoft is failing at creating customer satisfaction and customer loyalty. It is losing consumers in operating systems based on a failure to create satisfaction which leads to lack of customer loyalty. Reports indicate that Vista despite five years of development and billions in R&D was a failure. It is losing customer satisfaction with MSN to Google and therefore losing loyalty.

The simple solution to a large portion of the company dilemma is begin to examine CRM. The question we would present to Microsoft is although you are selling CRM software to clients are you taking a portion of that revenue and using it to purchase your own CRM software?

Based on its failure to maintain customer satisfaction and loyalty it appears evident that the answer to the question is “NO”. Microsoft’s number one priority at this critical time should be focus and concentration on CRM. If it continues to fail at this task despite its efforts at R&D and acquisitions shareholders will witness the same historical results. The company will continue to fail at securing customer satisfaction and loyalty without taking the required attitude of “what do consumers want”.

The company should start asking its corporate clients that perhaps use its operating system “what would it require for you to advertize on MSN?”

It should begin asking consumers “what would you want to see product and service wise to have you use MSN for search”?

By becoming more focused on the consumer and becoming CRM minded and efficient, Microsoft would obtain the ability to respond to the consumer, it would develop relationships with clients that would ultimately translate into consumer satisfaction and consumer loyalty.

Despite that being said, we are also advocating a “search” deal with Yahoo. We don’t advocate a full acquisition of the company. Numerous analysts have argued that a “search” only deal could accomplish what an entire acquisition was going to achieve.

With a search only deal Microsoft has the ability to enhance market share and become more competitive with Google. The combined “search” would provide MSN with approximately 30% of the market share. This will substantially narrow margin between Google and MSN.

However, we want to revert to the CRM dilemma. This ‘search’ deal will fail to have the same results if Microsoft pursues the deal without focusing on CRM. If it fails at the CRM approach it simply equates to another deployment of capital that may still result in losing market share to Google. The most integral component to any pursuit to enhance share and revenue is to become CRM focused. Failure to adopt this approach will result in the company potentially losing additional share to Google.

Microsoft SubNet (question):

You have issues with the Verizon deal, indicating it would require each user to conduct 17 searches on their phones in the next five years. And it also seems that you are advocating that Microsoft acquire Sprint (with concern that Google would acquire it instead) instead of make partnership deals with Verizon. Sprint is a mess ... if this a core concept of your new strategies agenda, can you explain how such an investment would be good in 2009, when other large scale investments in the tech industry have not panned out?

The Crandrea Group (answer):

Microsoft has spent tremendous capital to enhance its mobile division. However, despite this spending it still struggles to remain competitive with iphone and RIM.

According to Citi analyst Mark Mahaney, Microsoft is required to have each Verizon customer conduct 17 searches per month to break even on the deal. Additionally, Microsoft is required to pay Verizon approximately $600 million over a five year period. Based on this alliance we are uncertain if the capital deployed will translate into sufficient market share and revenue growth.
Forming an alliance or partnership is more problematic than acquiring a company. When you acquire a company you are aware who is in charge of the overall strategy. You are also aware of who owns the asset. However, with alliances, it’s influence not authority that governs the partnership.

Alliances also require both companies to posses the same vision and long-term strategy for the market. It requires sharing information and process. For example, one partner selling process may need to link to another partner service process.

However, as mentioned, the dominant issue is control. Through alliances, a partnering company fails to have overall control of the alliance. It lacks control over strategy, deployment of finances, and other integral issues.

Therefore, with the Verizon deal, Microsoft fails to control the overall direction, strategy, financial stability of Verizon. However, through acquisition the company has full influence and command of these elements.

Microsoft has the financial capacity to pursue a acquisition of a mobile service company. Partnerships or alliances potentially lack the same ability to create revenue as acquisition growth. The argument, does the multiple alliances have the same capacity for revenue growth as a full acquisition?

Sprint is a company that according to 2007 Annual Reports generated $40 billion in revenue. As mentioned, do alliances with multiple companies provide Microsoft the potential to generate $40 billion in additional revenue?

Sprint currently has approximately 40 million mobile subscribers. This would provide Microsoft with direct access to these subscribers.

We believe that current market conditions create the optimal opportunity to pursue acquisition growth. During the dot-com meltdown, numerous viable companies lost tremendous market value. There where obviously several companies that evaporated based on poor business models, however, there where still numerous viable companies trading at record lows. This created premier opportunity for companies such as Microsoft to pursue growth through acquisition.

Numerous analysts and other company executives have indicated that with the market at record lows it creates tremendous opportunity for companies with strong financial positions to utilize the market and accelerate growth. Sir Richard Branson stated during a CNBC interview that Virgin Group will pursue acquisition growth and emerge from the market volatility stronger financially.

Sprint based on current market volatility is trading at approximately $3 per share. The company has a market valuation of approximately $7 billion. However, in June of 2007, the company shares were trading at $24 providing the company with a market valuation exceeding $50 billion. This provides Microsoft the optimal opportunity to acquire a viable operating company at an extreme discount.

Microsoft has announced its intention to deploy $40 billion in share buybacks. Historically, this strategy has failed to create shareholder value. Our “New Strategy” involves Microsoft spending capital to accelerate revenue growth through acquisition. Through its current strategy of deploying $40 billion on share buybacks, there is the potential that the capital will fail to create shareholder value. It will also fail to create revenue growth. However, through the “New Strategy” Microsoft can acquire a major mobile services company. It can add $40 billion in annual revenue. It can divert the $40 billion in share buybacks to eliminate Sprint company debt.

If Google proceeds into this acquisition, the potential impact on Microsoft and its revenue growth and market share is beyond measure. Therefore, it is more effective for Microsoft to acquire a valuable asset at a discount that will directly enhance revenue and help propel market share within the mobile sector.

The acquisition provides Microsoft with complete control of the asset. It also provides Microsoft the opportunity for synergies with existing Microsoft technology and current Sprint technology. As mentioned, it also provides Microsoft with direct access to 40 million subscribers.

The Sprint acquisition creates opportunity for greater potential. Through the current strategy, in 2013 the company will have spent $40 billion on share buybacks. It will have spent an additional approximately $40 billion on R&D. At that time what will mobile services market share be?

The other question is how much will annual revenue equate to?

However, through the “New Strategy” and the acquisition of Sprint, Microsoft spends $7 billion to acquire a company that was previously valued at over $50 billion. It secures control of the asset. In 2013 it has combined revenue of at least $100 billion based on annual reports.

Microsoft SubNet (question):

What do you think of Microsoft's first-ever issue of commercial paper? Good or bad for the company's growth prospects?

The Crandrea Group (answer):

Although the commercial paper has obtained a triple A rating from Standard and Poor’s, the concern is the statement within the Microsoft website. The company within its website contains an article referring to the 2008 announcement. However, it states that the paper might be used for the repurchase of shares.

As you have probably realized we are not supporters of the share buyback strategy. The company in 2004 announced this initiative. It through the period of four years spent $40 billion on share buybacks. Despite, strong economic growth prior to the market volatility of 2008, the company initiative failed to create any shareholder value.

Therefore, despite deploying $40 billion in capital for share buybacks, the shares remain stagnant at the same level as in 2004 when it began the program. This was obviously a failed plan and therefore shouldn’t be pursued again. This strategy will simply prove to be detrimental to long-term shareholder value.

The company is required to abandon this strategy of share buybacks and divert the capital towards plans or initiatives that create true long-term value. We understand that buying back shares reduces the shares outstanding and therefore increase earnings per share. However, both Warren Buffet and a 2007 Standard and Poor’s study are opposed to share buybacks. Mr. Buffet states that it penalizes the long-term shareholder when repurchases are above the intrinsic value. He states that its poor business to buy a dollar for a dollar and ten cents.

However, spending your capital to buy back stock also indicates that you have no ideas for using that capital to build your business, and are instead converting it into value for shareholders, including executives and employees holding options (the opposite of diluting your stock by creating new shares).

Essentially, Microsoft is doing what Dell thought Apple should have done ten years ago: shut things down and give the money back to shareholders.

If Microsoft had any implementable ideas, it would be using that $40 billion to make more money, just like Apple has used its capital to rapidly expand its business while earning more cash on hand. Apple isn’t buying back its stock because it thinks it can make more for investors building new business than it can by simply giving the money back. As a result that has translated into a 1,200% return to investors within four years.

Typically, companies engage in share buybacks when no compelling growth opportunities can be recognized. Therefore, the only strategy that Microsoft management can perceive is to use tremendous amounts of capital to penalize long-term shareholders instead of deploying capital to increase business services, product mix, revenue growth, market share and ultimately shareholder value.

If Microsoft however uses debt to pursue growth then we certainly support the strategy. Microsoft currently generates approximately $20 billion in net income. Therefore, financially it is secure to use debt to pursue business growth. Instead of pursuing share buybacks the company should use the debt to accelerate growth and create shareholder value.

Since the Yahoo bid failed, we are uncertain as to how the deal would have been structured. However, if Microsoft was seeking to spend $45 billion for Yahoo, it should be willing to utilize some debt and accelerate revenue growth through acquisition when companies are trading at record lows.

Microsoft SubNet (question):

The company has been growing top line revenue -- it hit $60 billion last year and profits have also been inching up. Is it fear that Windows is dying that is keeping Wall Street from seeing Microsoft as a good long-term bet?

The Crandrea Group (answer):

Microsoft has been often referred to by Wall Street as a utility. Wall Street has stated that it displays characteristics reflective of a utility, it can provide dividends, however, it lacks growth potential.

In 1999 Microsoft reorganized and defined its operations into five main categories. According to its Annual Reports, these consist of Client, Server and Tools, Microsoft Business Solutions, Online Services and Entertainment and Devices.

Of these divisions, the greatest revenue generators are Client, Business, and Server and Tools. However, the strongest rates of growth are in are Entertainment and Devices, with Server and Tools placing a distant second.

80% of Microsoft's revenues come from sales of Windows, Office, and Server & Tools (used by IT professionals to manage groups of users), but while revenue from these products is steady, it is slow-growing, at a 15% percentage change in revenue year over year. In contrast, Microsoft's Online Services and Entertainment divisions had over 30% year over year growth in 2007, and the company has sought to emphasize these divisions in its future plans even while these groups are not yet the major source of the company's profitability.

The client segment, accounting for approximately 28% of total revenue, includes sales and marketing expenses for the Windows operating system. 80% of this revenue is from the sale of products with pre-install versions of Windows operating systems.

In 2008, revenue growth was primarily contributed by an increase of licensing Microsoft Office, increased sales of Xbox, and increased sales of Windows Server and SQL Server.

80% of Microsoft's revenue comes from software sales, primarily MS Office and MS Windows - both of which are packaged with a PC. A slow-down in PC purchases in most developed countries means a decrease in profit growth for Microsoft as well.

Another trend is the increase in popularity of netbooks. This innovation has replaced laptops, and many corporations are acquiring netbooks as opposed to desktop computers. This equates to a reduction in licensing revenue for Microsoft. These computers are more targeted towards web-based applications or “cloud computing”. The growth of SaaS means there is more competition for traditional Microsoft products like Microsoft Office. Browser-based software represented approximately 5 percent of business software revenue in 2005 and, by 2011, 25 percent of new business software will be delivered as SaaS.

Although shareware, open-source, or low-cost alternative software (like Google Spreadsheet), and Open Office by Sun Microsystems, are still several years away from the security and functionality most businesses need, analysts agree that software will continue to move towards these browser-based models in the long term. Microsoft is taking steps to benefit from this trend itself, starting with the release of a new version of its Microsoft Exchange Server that is available on demand. Furthermore, the next Office suite will be available as On Demand on the Internet.
Microsoft also experienced a dramatic negative response with its 2007 release of Vista.

Numerous reports indicate that the majority of consumers have remained with earlier versions of Windows, such as, XP and 98. This has caused a decline in revenue for the company, and an exodus of Windows users to other platforms.

Therefore, Microsoft is confronted with competition within its operating systems revenue generation. Oracle is a threat based on its support of Lintel. Google is poised to offer a threat based on its expanding into browser based applications.

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.

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. Wall Street and analysts are looking forward and sense 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.

Microsoft SubNet (question):

Given what we know about the current financial crises, are you still advocating that Microsoft acquire a large bank? Isn't banking a bit outside the core compentencies of a software maker?

The Crandrea Group (answer):

Yes, we are still advocating that Microsoft acquire a large bank. Numerous companies have expanded into offering financial services. We mentioned earlier Sir Richard Branson and the Virgin Group of Companies. This is a company that has continued to expand its product mix and services. As a subsequent result, the company has continued to propel revenue growth and value.

The Virgin Group offers within its product mix, Virgin Airlines, Virgin Mobile and Virgin Money. Through Virgin Money, which is its financial division, the company offers services primarily through alliances with other banks. Through this initiative it offers credit cards, loans, mortgages, insurance and savings accounts. Although Virgin Group is a private company and therefore financial data is not available, the company has introduced various services that have been utilized by consumers and increased revenue for the company.

In Canada, both Loblaws and Canadian Tire have launched financial services to the consumer. The company Loblaws is a chain of grocery stores and Canadian Tire is a retailer. Both of these companies have experienced an increase in revenue and profits based on the introduction of these services.

One could argue, isn’t financial services outside the core competency of a grocery chain? However, the company has created revenue growth and manages a credit card receivables portfolio worth billions of dollars. The primary benefit of Loblaws is its ability to offer “rewards” above conventional banks. Consumers that utilize the financial services obtain “rewards” that can be redeemed towards free groceries. This “reward” system has resulted in numerous consumers switching from conventional Canadian banks such as RBC or TD to utilize Loblaws and its PC Financial.

Canadian Tire offer consumers a similar service. However, the primary difference between Canadian Tire and Loblaws is that Canadian Tire has established a actual bank while Loblaws has an alliance with CIBC. The bottom line is that consumers utilize financial services from both companies that are operating outside their original core competency. Additionally, it has enabled both companies to expand the product mix and propel revenue growth.

Within our website we make reference to Jack Welch and GE. During Mr. Welch’s tenure the company expanded beyond its core competency and entered financial services. As a result, this division equates to generating more than half the company annual revenue. The company has evolved from primarily a technology company to a conglomerate that provides financial services. This transition enabled the creation of tremendous shareholder value. Additionally, this division still experiences growth and an increase in annual revenue.

As previously discussed, Wall Street perceives Microsoft losing revenue and market share within its operating system division. It recognizes that currently Microsoft has nothing to replace the potential decline in revenue and growth potential. Therefore, Microsoft is required to re-examine its business model. In today’s rapidly changing environment its imperative that companies constantly examine their business model. Microsoft once had a powerful business model and was demonstrating growth. However, its confronted with free software, web-applications, and competition from Oracle and Apple.

Microsoft was seeking to spend $45 billion to acquire Yahoo. This expenditure was a strategy to enhance its online business and create additional revenue.

The company is also seeking to deploy $40 billion on share buybacks. As mentioned, this is a strategy that is a tremendous waste of capital and fails to create any true shareholder value.

Our “New Strategy” involves acquiring a major bank. As mentioned within our website, we initially considered the probability of this strategy and discovered that it has proven viable for other companies.

Microsoft could potentially enter financial services in a strategy similar to Virgin Group, or Loblaws, and partner with a major bank. However, as mentioned, the company was seeking to deploy $45 billion to acquire Yahoo. Our “New Strategy” involves deploying less than the Yahoo bid to secure an acquisition of a major bank.

We present the same argument for acquiring a major bank as with the argument for acquiring a mobile company. The current market volatility presents companies trading at record lows. This enables strong financial companies to maximize this market condition and acquire assets at a extreme discount.

Although the market is displaying volatility and companies are trading at record lows, similar to the dot-com crash, there are still viable companies trading below their true value. Therefore, this creates opportunity for acquisition.

Although the market is displaying volatility, numerous analysts have stated that since banks have reduced their lending and have become more cautious is lending that during this period numerous banks will actually have substantial earnings. Several analysts based on this reality are stating that during the current market conditions that banks still present opportunity for a investment and possible increase or return on the investment.

Our “New Strategy” involves Microsoft deploying capital that is less than the proposed Yahoo bid. With current conditions it can deploy less than $45 billion to acquire a major bank, a mobile company and potentially a “search” deal with Yahoo. Therefore, instead of spending $45 billion to acquire just Yahoo, it can spend $45 billion to acquire a major bank, mobile company and increase its online division with a deal with Yahoo.

Our “New Strategy” involves examining other companies that have introduced financial services and the benefits it provided for the company. As mentioned, it increases product mix and revenue growth.

Our “New Strategy” ultimately creates long-term vision for the company. Wall Street sees Microsoft losing its revenue and market share in operating systems with nothing to replace this depletion. Microsoft currently has numerous commercial clients. Suppose Microsoft could offer that company operating systems for its computers. However, since Microsoft owns Sprint, it can offer the same client mobile services for its employees. Microsoft also owns a major bank, therefore it can offer the same commercial client loans to acquisitions or restructuring, it can offer mortgages for acquisition of property, it can offer company credit cards, it can offer fleet car insurance for the client, it can offer medical insurance for the client’s company employees. Subsequently, Microsoft becomes the clients software provider, mobile services provider, financial provider, and insurance provider.

As a client, would you choose a conventional bank or Microsoft with the additional services. Or as a client would you choose a competitor of operating systems, or would you utilize Microsoft to obtain access to financial services and mobile services. This cross-promotion has proven beneficial for Loblaws, Canadian Tire and Virgin Group.

Although we are in a financial crisis, the economy will emerge. Depending on the economists we wish to believe that will occur in 2009. Therefore, it is logical for Microsoft to utilize its cash and the current market and increase its product mix, and subsequently potentially offset the decline in operating systems, and enhance revenue growth.

Microsoft SubNet (question):

Phone carriers like Sprint/Nextel face issues because of market saturation and the decreasing value per minute that they can bill. Carriers are in a declining industry, which means their consolidation is a natural function of the market, so it is hard to see why buying one is better than partnering with several. What kinds of mobile services would you like to see Microsoft create and why does controlling the carrier matter?

The Crandrea Group (answer):

Without reiterating to a large degree, acquisition is better than creating multiple alliances. As previously discussed, alliances restrict direct control and create more difficulty than direct acquisition. As mentioned, with an alliance it is influence and not authority that governs the partnership.

You mentioned consolidation. We make reference to consolidation within our website and discuss that consolidation would benefit Microsoft. It enables Microsoft through the Sprint acquisition the opportunity to acquire additional mobile companies to increase market share.

Suppose that Microsoft creates multiple alliances. It creates alliances with both Company A and also Company B. Both of these alliances are created by Microsoft to increase its brand awareness and propel revenue growth and market share. However, after years of negotiations,(reports indicate the Verizon deal required two years), Company B is acquired and consolidated into Company A. What type of effect does that have on the alliance?

As previously mentioned, acquiring Sprint enables Microsoft to have complete control and authority of the asset. Without complete ownership an alliance company can make a decision that will directly impact Microsoft. Perhaps Company A seeks to consolidate with Company B. However, that acquisition creates financial pressure on Company A since its utilized to much debt. Microsoft through an alliance has no direct authority over this alliance based decision.

Since our “New Strategy” involves acquiring Sprint, it enables Microsoft to utilize its cash flow and improve Sprint’s balance sheet. Since Microsoft would own Sprint it can use its profits and net income to be injected into Sprint.

With direct ownership of Sprint, it can also utilize its cash to eventually pursue consolidation within the telecom sector. Sprint is currently the third largest behind Verizon and AT&T. There is the potential for Microsoft to increase revenue growth potential and through Sprint acquire smaller mobile companies.

As mentioned in our website, Microsoft should not be content with alliances that will create incremental revenue growth when it has the capacity for acquisition growth. Sprint according to its annual report generated $40 billion in revenue. This revenue would subsequently be added to Microsoft’s annual revenue.

Therefore our primary argument against alliances is the amount of value that will actually be created. The Verizon deal involves a five year alliance. However, in 2014 what will be Microsoft’s annual revenue through this alliance and how much market share will be achieved. We have to agree with analysts and predict that the actual impact of this alliance will be minimal.

Our argument that through acquisition of Sprint, in 2014 what will Microsoft be generating in annual revenue. It has the capacity to acquire Sprint, a $40 billion a year revenue generating company. It has the capacity to pursue additional acquisitions within this sector. Therefore, in 2014, through the acquisition of Sprint, and potential consolidation will revenue growth exceed the current $40 billion.

The acquisition provides the company opportunity to enhance it mobile services. It enables the company to offer consumers, web based application on handheld devices. It enables the company to add $40 billion in revenue. It also provides the company with opportunity for additional acquisition.

The main reason for the campaign and “New Strategy” is as mentioned we observed the historical company share performance. We reviewed and researched the company plan and strategy. We analyzed the results of the “strategy”. We reviewed reports from consumers, shareholders, analysts and reporters. We recognized that the company requires a “New Strategy”.

The dilemma is that Microsoft has committed to continue with its “Old Strategy” that has proven to have no real success. It is losing market share, losing consumers and failing to create shareholder value.

The “New Strategy” abandons share buybacks. This has failed to elevate the share value. It capitalizes on current market conditions and accelerates growth through acquisition.

The reality, Microsoft can continue with its current “Strategy” and it is difficult to predict the effect this will have on the company. Based on passed performance it will fail to obtain market share, will loss more consumers, and fail to elevate the share price.

With the “New Strategy” it leverages its cash position and debt rating, exploits the current market conditions and pursues growth. It acquires valuable assets at a discount. The company has the potential to create initiative that will provide it with revenue growth that will create a company with $300 billion in annual revenue and $30 billion in net income. This fails to factor the value that cross-promotion and consumer loyalty will create overall for the company.

The complete article by Microsoft SubNet can be accessed via http://www.networkworld.com/community/node/37991

In our last post we included various comments from Microsoft employees extracted from other blogs. We want to briefly follow a similar pattern.

Listed below are some comments from Microsoft employees taken from the comments section of the Mini-Microsoft blog dated January 22, 2009 and titled "Microsoft Layoff-Now What?".

It is located at http://minimsft.blogspot.com/2009/01/microsoft-layoff-2009-now-what.html

This post obtained over 600 comments. Obviously we will not post every comment. However, below are a few of interest.

A Microsoft employee states:

5000 is laughable. Wall St. was expecting to see more as a buffer to the poor earnings. And now the street is reacting. I should have shorted MSFT. I left 8 months ago and am so glad. Frankly, I can't imagine working there with the spectre of more layoffs coming. You have to know that it won't stop at 5000. And then with no raises, effectively a pay cut for everyone. Just amazing, but I'm just stunned at MSFT leadership short sightedness. IBM released great earnings, Apple as well. Microsoft leaders just haven't stepped up to think strategically. More that should have been done...- Eliminate MCS...gone. Take 1/2 the money saved from that and fund large numbers of RSI and NSI companies.- WW EPG and WW SMSP...gone. They just fly around to justify their existence anyway. - Deeper layoffs...as many have said, cut once and cut deep.Sheesh, Ballmer et al...you suck.
Thursday, January 22, 2009 8:03:00 AM

Another employee states:

As a former employee but still in the channel and with a lot of stock at risk here, I view this as a cleaning house effort. What concerns me is that only 1400 lay offs occur today and the other 3,600 could take over 18 months. This will only increase the trends I saw of management spending an inordinate amount of time on stack ranking and reviews as well as employees justifying their positions. Management and employees need to focus 90% of their time on customers and partner and 10% on internal versus what I saw which was 90% internal focus and 10% external focus! I believe the products and technology offer an incredible opportunity for consumers to benefit but Microsoft needs to adjust to an external focus immediately and abandon the extreme internal focus. Perhaps new execs would help.
Thursday, January 22, 2009 8:07:00 AM

Another employee states:

I left two years ago, as it had become a really awful environment place to try to do good work. In that time, I'm sometimes struggled and questioned my decision.Today I feel sad for my friends, and very much at peace. This just demonstrates, yet again, how amazingly inept the upper and mid-level management is over there. All of the information employees are getting via Mini should have been communicated internally first. There's absolutely no respect flowing FROM management to employees, so why should there be any back?The next rounds will be less generous and the mood will be worse as the company circles the toilet.Exactly correct. Head for those lifeboats. The correction for seven (ten?) years of stock stagnation is just beginning...
Thursday, January 22, 2009 8:50:00 AM

Another comment:

This is an extremely bad day for Microsoft. Management gives wall street no warning they will miss earnings targets, hence investors assume if they stick to traditional earnings release date they must have made their numbers. The company then misses the numbers but has results largely in line with what buy side investors forecasted.The company holds a call with investors and manages to drive the stock down further. It is clear the company has reacted more slowly to the downturn than other leading companies such as HP, CSCO, IBM. Management also releases a confusing attrition plan, and seems to minimize to investors the net reduction in headcount. So the company has achieved the following in about three hours :Decreased it's market cap by $20BReduced credibility with investorsConfused employees with a long tail plan of attritionThis is a bad day and was managed almost as poorly as could be scripted.
Thursday, January 22, 2009 9:15:00 AM

Another comment:

"This is a bad day and was managed almost as poorly as could be scripted."Agree, but the poor handling goes all the way back to last quarter. First with the overly optimistic forecast, despite the guidance reduction, that most didn't believe at the time. Then not jumping on the Intel warning during the quarter and using it to temper expectations. And finally with the failure to issue a pre-warning weeks ago despite having full knowledge that the company was going to badly miss guidance and consensus. Steve's "the fact that we're growing at all" falls flat given IBM's and Apple's result. And the "we acted quickly" is negated by analysts who are on record last quarter asking MS why they weren't being more defensive given the deteriorating economy. The truth is that management simply procrastinated until it was too late. The stock is now at a new ten-year low, and with no forward guidance other than a decrease from last year, $15 or less is likely in the weeks ahead. The 5000 layoffs over 18 months doesn't make sense. It's too few to make a difference and the extended period would hurt morale. In all likelihood, the town meeting tomorrow will assure employees that this was just for Wall St. and that most of it will be taken care of by normal attrition. The street already sees through this sham.The only question left is does Ballmer survive this? He's been second-guessed and criticized for most of his term, but until now the company by and large made their numbers and that kept him safe. This result ends that, and not just now but for the rest of the year and maybe even several years. This really feels like a crossroads for MS, one where the company can either change and prosper or not change and wither.
Thursday, January 22, 2009 11:00:00 AM "

Another comment:

Stocks now at 17.50, 50% what it was this time last year.Good thing management switched their bonus structure to cash vs. stock for this year. Anyone going to call them on it tomorrow?
Thursday, January 22, 2009 8:28:00 AM

As mentioned, there are over 600 comments from this one post on Mini-Microsoft. Above are only a few comments.

Since 2002, Microsoft shares have remained relatively flat and stagnant

In 2004, at an annual meeting Mr. Ballmer stated that based on the success of the company plans, the shares will take care of itself. However, in 2008 the shares were still stagnant and flat with minimal variation. For a period of approximately eight years the shares have remained flat.

Refer to chart at http://www.networkworld.com/community/node/37634

Prior to 2003, Mr. Ballmer stated that Microsoft being a technology company with tremendous growth potential doesn't engage in dividends. It was stated that companies with minimal growth provide shareholders with dividends. However, in 2003 Microsoft initiated providing shareholders with a dividend.

In 2004, Microsoft announced it was going to initiate a share buyback strategy. Since 2004 the company has deployed $40 billion on share buybacks. This effort has failed to elevate the share price. However, despite this failed strategy the company has announced that it will deploy an additional $40 billion in share buybacks.

According to a email we obtained from Microsoft Investor Relations the company has deployed $115 billion in share buybacks and dividends since 2004. Despite this massive expenditure the shares have remained flat for four years. Therefore, despite Mr. Ballmer stating "the shares will take care of itself", the company shares have remained flat. The greater concern to long-term shareholders is the notion that the company has announced it will deploy an addiitonal $40 billion in a historically proven failed strategy.

Another comment from mini-microsoft

I think that being more competitive in the browser market is a must for our future. The web browser has been taking over the OS in importance for a while now and the future is devices like cell phones not full PCs. The fact that winmo is looking a bit long in the tooth and ie is slow and clunky compared to most competitors does not bode well for the future. The only bright spot is that we are investing in server infrastructure for "cloud" computing. That is where the future growth is, not in a mostly saturated PC market. I am hoping to hear a more cohesive strategy around future technologies or else the street will continue to pan the stock price if we keep sounding like we are just going to do what we always do.
Monday, January 19, 2009 10:36:00 PM

Although Microsoft still controls over 90% of the OS market share, data indicates that the company is losing share to competitors such as Apple. In previous posts we have provided reference to NetApplications and charts concerning OS market share. Reports indicate that competitors such as Apple are securing market share.

Based on the poor performance of Vista and consumers dismal response to the operating system, Microsoft is required to ensure Windows 7 is the success Vista failed to acheive. For a review and insight into this dilemna refer to article by Mitchell Ashley at http://www.networkworld.com/community/node/37956

This atricle outlines the probability that Windows 7 will fail to capture consumer interest and will subsequently fail to have consumers upgrade from older OS versions. This will subsequently have a dramatic impact on the company and its revenue growth potential.

There has been increased popularity with "netbooks" which will also threaten potential growth and revenue generation for Microsoft. The final dilemna is that which is mentioned and referenced above within the comment from mini-microsoft. There appears to be a drastic change from PC to handheld devices.

These trends and changes threaten Microsoft and its ability to propel revenue growth. Therefore, it is mandatory that the company pursue initiatives that will provide the company revenue growth potential.

Wall Street has already referred to Microsoft as a utility. If the company fails to capture consumers through Windows 7 it will continue to expereince a exodus of consumers to other competitiors and their OS.

Microsoft is required to adopt a "strategy" that will enable the company to maintain revenue and propel growth. While reviewing comments in blogs we observed a comment that Microsoft should abandon MSN and its attempt to acheive advertising revenue. The argument was total

advertising spending is approximately a $30 billion market. It was stated that software is a $300 billion consumer market. Therefore, the author of the comment stated Microsoft should dismiss a $30 billion market and focus on its core traditional market of software.

However, the dilemna with this argument is that Microsoft has already deployed billions into R&D and acquisiitons within this market. It is displaying minimal growth. It is a large market at $300 billion. As mentioned, based on trends that market is changing towards "netbooks" and "handhelds". Additionally, the company should not be content in an attempt to capture a $300 billion market when it can capture a percentage of a multi-trillion consumer market.

In previous posts we refer to GE and other companies that have expanded into financial services. Microsoft has a capacity to acquire a major bank. We have referenced acquiring ING. This acquisition provides Microsoft with a global presence and also provides the company with online service through ING Direct.

Microsoft has the capacity to acquire ING which according to Annual Reports generated over $200 billion in annual revenue. Therefore, why should Microsoft pursue obtaining a portion of a $300 billion market when through a acquisition can obtain an asset that generates in annual revenue 2/3 the entire software market?

We have outlined the premise for the bank acquisition in previous posts. Therefore, we will at this time refer to prior posts. It enables Microsoft to offset the potential decline in revenue through OS. It provides the company with additional annual revenue and earnings. It provides the company with cross-promotion advantages.

Numerous analysts state that Microsoft's announcment of the Verizon deal was the company attempt to secure market share. However, as mentioned in previous posts, this deal will potentially fail to provide the company with substantial revenue growth.

Handheld devices are increasing in popularity. There is also the increase in "cloud-computing". Microsoft is required to direct its attention towards this trend. Therefore, Microsoft should aggressively pursue this market.

As argued in previous posts, it is more advantageous to acquire a company than to create alliances. It is more strategic to acquire a company than pursue multiple alliances.

Microsoft failed to recognize the significance of the Internet and subsequently has lost market share to Google. It is critical the company recognize the trend towards "handheld" devices and pursue a strategy that provides market share and revenue.

The acquisition of Sprint will provide Microsoft with market share and also an additional $40 billion in annual revenue. Therefore, a complete acquisition will provide greater value to shareholders.

Microsoft is required to secure a "search" only deal with Yahoo. This will enable the company to secure additonal market share and potentially advertising revenue.

In the interview and previous posts we refer to the fact that historically Microsoft has deployed $40 billion on share buybacks. It has recently commited to spend an additional $40 billion over a four year term. This "strategy" will fail to create shareholder value.

The company is losing market share and consumer loyalty within OS. Therefore, it is mandatory to replace this depletion in revenue and growth potential.

The company has forged alliances with numerous telecom companies to increase market share within mobile services. It has the financial capacity to acquire a telecom company and dramtatically increase revenue.

The company has deployed billions on R&D in an attempt to secure market share within existing areas of operation. Refer to chart at http://www.networkworld.com/community/node/37634

Microsoft since 2004 has deployed enormous capital towards "strategies" in an attempt to increase revenue and market share. According to Mr. Ballmer "the strategies success will ensure that share price takes care of itself". However, after four years of massive spending and strategies, the shares remain flat.

Microsoft was seeking to deploy $45 billion to acquire Yahoo. Our 'New Strategy' involves deploying a similar amount of capital.

Our "New Strategy" involves:

1) Abandon the failed share buybacks. Divert capital to creating additional revenue and subsequently shareholder value.

2)Utilize current market conditions and pursue revenue growth through acquistions.

3) Acquire a major bank. This will enhance product mix offerings to consumers of current Microsoft products and services.

4) Acquire a major mobile services company. This will enhance annual revenue.

5) Pursue a 'search deal' with Yahoo. This will enhance market share and revenue.

Old Strategy

1) $40 billion to be spent on share buybacks. Massive spending with minimal or no result in creating value.

2) Massive R&D spending. Failure to translate into new "innovative" products and subsequently additional revenue.

3) Alliances with numerous mobile companies. Limited revenue growth and potential loss of market share to competitors.

Through the "Old Strategy" in 2013 Microsoft will have deployed $40 billion in share buybacks. It will have deployed aproximately $40 billion on R&D. It will have released its new OS Windows 7.

In 2013, based on this "Strategy" what will be reflected in the share price and the creation of shareholder value?

Through the "New Strategy" Microsoft uses current market conditions and acquires ING, Sprint and a 'search' deal with Yahoo. The company deploys $40 billion to acheive these "strategies" based on current market valuations and also offering a premium.

The combined company generates $300 billion in annual revenue. This is based on revenue generated according to company annual reports. Currently, Microsoft generates $60 billion, ING generates $211 billion, Sprint generates $40 billion. The $300 billion factors in the Yahoo deal but fails to factor potential growth through cross-promotion.

The combined company generates $30 billion in net income. The combined company through net income generation has the ability to pay down debt from acquisition. Therefore, both ING and Sprint have improved balance sheets.

In 2013 Microsoft is a $300 billion in revenue, $30 billion in net income company. It offers consumers its five business platforms plus financial services. It has $30 billion in net income to provide dividends and pursue additional growth in financial services and telecom.

Microsoft can pursue "Old Strategies" to the detriment of shareholders or it can emerge from current market conditions more financially stable. It can enhance its product mix and dramatically increase revenue and shareholder value.




We can be contacted at thecrandreagroup@hotmail.com

Monday, January 12, 2009

Microsoft, Will it Survive without a "New Strategy"?

Prior to creating this blog, we engaged in research of numerous articles, data, analyst reports and shareholder blogs to conduct a analysis to create the "New Strategy". After reviewing the information, which included the blog http://msftextrememakeover.blogspot.com/ (which has disbanded posts based on subsequent frustration). The creator of extreme makeover spent tremendous efforts analyzing Microsoft. The blog also included numerous comments from shareholders and Microsoft employees.

Within the msft extrememakeover blog are various comments that require mention.
In the April post :

So are you still around at The 'Soft or what? I am a long time reader here and have commented on every post you've made. I left the company three weeks ago after 10 years in. I am now a VP at a partner. I have to tell you, leaving was the best decision I've ever made. Sold most everything at $30 and $32 before leaving. Now, enjoying every day so much. Actually working at a company peopled with grown ups makes all the difference. Being treated with respect, priceless. The Microsoft detox feels so good, SOOOOOO good. 6:03 AM

In the April post another Microsoft employee "Former MS Winbuilder "states:

"leaving was the best decision I've ever made"'Extreme, I have to admit, my experience has been the same, even in this short time. I'd go so far as to call it an epiphany period in my life! The freedom, the satisfaction, the people actually, sincerely thanking you for coming to their company and helping them (when was the last time that happened), the joy I'm experiencing in my life now, it is truly a revelation, a liberating experience.I find myself now wondering why, why did I hang on so long? And then I realize that the reason was so I could truly learn to truly appreciate how good it is to be away from the toxic success I knew as a 'Softie.Your life, your TRUE life awaits you outside the gates of 1 Microsoft Way! 6:03 PM

A Microsoft employee stated:

I look forward to the day I leave Microsoft, or the day Ballmer does. Until then I can't stop caring how we do and every day it kills me a little more watching this once great company rot.4:12 PM

Another Microsoft employee states:

This is by far the best article I've read on the subject. It should be mandatory reading for every exec in the company. Hard to believe it's been 3 (great) years since I ended my own short-lived blogging career and left Microsoft. That place just isn't worth the frustration and aggravation.

Another post reads:

That web site for Windows suggestions is just about the saddest thing I've ever seen. Not because it's a bad site, but because MSFT's attitude towards it seems to be, "oh interesting, customers care about fit-and-finish? Maybe we'll do something about that."Apparently the idea to make good products got lost in the mix. For some reason everybody spent 5 years working on WinFS when the simple ability to reorder things in the task bar would have made the world a happier, better place.Tells you just about everything you need to know about the current state of the products

These comments are extracted from a former popular blog that was disbanded from frustration that Microsoft wouldn't listen to constructive comments from shareholders and users. Perhaps this comment extracted from the same site summarizes shareholders feelings:

Always enjoyed reading your posts. Unlike 99% of bloggers out there, you actually took the time to look at and understand the facts before arriving at an opinion.For anonymous @2:57, I rather think you have it backwards. I am sure MSFTextrememakeover will be fine without MSFT. In the long run, I'm not sure the reverse is true (although since leadership at MS is so resistant to listening to anything approaching reason, I'm not sure how much better off MSFT would be WITH him, either).

In the April post Charles states:

Ballmer must have a really low opinion of the average investor's IQ if he thinks we can review data like this and still believe him that MSFT has a "solid" strategy here with or without YHOO.

We decided to include the post from Charles,based on the reference of Mr. Ballmer believing that Microsoft has a "solid" 'Strategy'. This is the subsequent reason that we have created a "New Strategy" for Microsoft.

Within our research we also conducted a search of frustrated Microsoft shareholders. This search lead us to articles such as "Are Microsoft Shareholders Fed Up" located at http://www.networkworld.com/community/node/35547.

This atricle outlines Mr. MacDonald that in the year 2000 acquired $3 million worth of Microsoft shares. Mr. MacDonald expresses frustration based on the share price remaining at the same level for approximately eight years. We reviewed information concerning shareholders and there frustration with share buybacks.

According to an email that we obtained from Microsoft Investor Relations, the company has since 2004, deployed $115 billion on share buybacks and dividends. This strategy has subsequently failed to elevate the share price and create value.

Microsoft has for several years been referred to by Wall Street as a utility. It has the characteristics of creating cash flow and dividends, however, it lacks growth potential. Based on historical performance it appears that Microsoft lacks the ability to be growth company and will ultimately become a dividend company.

Perhaps the greatest concern is that despite massive cash flow and cash reserves, Microsoft seems unable to find more effective use of its capital. The company has deployed $40 billion on Research and Development since 2000. It has spent approximately $12 billion on acquisitions within the same year period. Despite failing to elevate the share price it has also deployed $115 billion in share buybacks.

In an effort to reduce Google's online search and advertising market share, Microsoft attempted a $45 billion bid for Yahoo. This strategy displayed poor decision regarding deployment of capital.

We compiled information and subsequently created a proposal or "New Strategy" based on the general consensus of information. The "New Strategy", involved presenting strategies that alligned with shareholders frustration.

Numerous shareholders were frustrated with the premium bid for Yahoo. According to a 2007 article in MarketWatch , Dan Gallagher states:

The stock was down 30% since the first of the year-having never recovered from a sharp sell-off when the company announced a plan to buy Yahoo for $45 billion.

As mentioned in previous posts, during the 2007 annual analysts meeting Mr. Ballmer and Mr. Liddell stated:

Buying their way in

On Thursday Liddell and Ballmer threw water on the notion that Microsoft will make a large, dramatic acquisition to quickly make up ground in the online services market. One such scenario pondered by analysts has been the potential purchase of Yahoo Inc. (YHOO:Yahoo! Inc to team up against online search leader Google Inc. (GOOG:"Are there some big things out there that we could conceivably buy? Sure," Ballmer said, though he added that he and Liddell are "basically organic-minded guys" when it comes to growth.

This report can be found at http://www.marketwatch.com/news/story/microsoft-asks-wall-stree-have/story.aspx?guid=%7B82BA2F9C%2D2893%2D4E3B%2DAA4A%2D38483104C35F%7D&siteid=yhoof

In the begining of 2008, Microsoft announces a 65% premium bid for Yahoo valued at $45 billion. Despite, management stating there is no intention to acquire Yahoo, less than one year later the company not only pursues a acquisition, however, it also offers a 65% premium for the floundering company.

MSN Summit

Ballmer Defends Microsoft's $6.2B R&D Plan

By Paula Rooney, ChannelWeb 2:45 PM EDT Thu. May. 04, 2006 Page 1 of 2 -->

Microsoft (NSDQ:MSFT) will invest $1.1 billion in MSN online and $6.2 billion in R&D overall during its next fiscal year to escalate adoption of its MSN AdCenter and Windows Live! and Office Live! platform services, its CEO said Thursday.

Speaking at a Microsoft Network Summit, Microsoft CEO Steve Ballmer said the company may have surprised some in the financial community with the size of its planned investment in its online business in fiscal 2007 but he said it's necessary to outseat competitors. Microsoft will launch an interactive ad service with AT&T that is now "under the radar" as well as a variety of enhanced AdCenter and Live! platform services including Windows Live! Local, Ballmer said.

Ballmer said Microsoft also will increase its spending on capital expenditures fivefold to $500 million in fiscal 2007, which begins July 1.

"A global infrastructure is not inexpensive. In the AdCenter platform there's a big technology challenge and a big business challenge," said Ballmer, claiming there are only two or three companies that can deliver the infrastructure to handle customer demand and advertisers' needs. "Our No. 1 priority is software as a service."

As part of that, Microsoft will develop better user experiences through its Windows Live! and Office Live! platforms including customized Live! services and Office authoring services for consumers and small businesses as well as large companies.

Microsoft also will commit resources to develop local and domain-specific searching technology as well as searching macros that allow end users to "customize their view of the world and what's on the Internet," Ballmer said.

As illustrated by the charts, despite Microsoft committing capital to improve an enhance MSN, it fails to compete with Google in comparison to advertising revenue and "Search".

This failure to remain competitive despite massive capital expenditure is the subsquent decision to attempt a $45 billion bid to acquire Yahoo. It demonstrates that Microsoft regardless of its massive R&D expenditures and acquisitions to enhance MSN, have failed to remain competitive with Google. Therefore, it presented Microsoft with the evident dilemma of requiring a strategy that would increase MSN's marketshare with advertising revenue and "search".

Word from a developer at Microsoft (me):

We spend less than 5% of our time coding. All the other 95% is around the process and saying the same story time and again for an immense number of managers.Then if you consider that MS has 19000 managers and 12000 engineers (yes, more managers than engineers), and only 1/2 of those engineers are developers, you get the conclusion that of all operational expenditures on salaries only 0.3% goes towards coding. All the other 99.7% is waste: process and management.So right there you see how we spend billions in R&D, countless years to build Vista and other without results.

In 2000, when Mr. Ballmer essentially assumed control of Microsoft the company was generating approximately $22 billion in revenue and $9 billion in net income.

Since 2000, Microsoft has annually deployed tremendous amounts of capital on Research and Development.

In 2002, the company spent $5.2 billion.Microsoft To Boost R&D Budget, Focus On PC InitiativeMicrosoft plans to increase R&D spending by 10% and focus on PC Initiative.

By Aaron Ricadela InformationWeek July 26, 2001 12:00 AMMicrosoft (NSDQ: MSFT) plans to increase its R&D spending by more than 20% this year, investing the greatest percentage in a PC initiative that would enable people to enter data in new ways and report problems to Microsoft, according to chairman Bill Gates.Gates told financial analysts during a meeting Thursday that the company plans to spend $5.3 billion in fiscal 2002, which began July 1.

In 2001, Microsoft spent $4.38 billion on R&D. "We're not scaling back our R&D ambition at all," Gates said.

Gates boosts R&D budgetMicrosoft to add up to 5,000 jobs in new investmentCarrie Kirby, Chronicle Staff WriterFriday, July 25, 2003

Microsoft will increase its investment in research and development by 8 percent, and add as many as 5,000 people to its workforce, Chairman Bill Gates said Thursday.The software giant will spend $6.8 billion on research in fiscal 2004, compared to $6.4 billion in fiscal 2003, which ended June 30.

Microsoft originally pegged last year's R&D budget at $4.7 billion, but a retroactive accounting change due to the company's change in stock compensation increased the number.Microsoft will increase R&D spending every year "as long as we can," said Chief Executive Officer Steve Ballmer. "We need to push forward the frontiers of what we do." While Microsoft has already sold its Windows operating system to practically everyone with a computer, Ballmer said plenty of opportunities exist in newer areas such as handheld devices and business software.

The commitment to research and development is a sign that Microsoft intends to use some of its earnings to keep a wide distance between itself and its competitors. While many tech companies are cutting costs as they struggle with the continuing crunch in corporate spending, Microsoft has had a relatively good year and can use that to its advantage. Ballmer said bold investments will be better for Microsoft in the long run than aggressive cost cutting.

Gates: Microsoft's Upping Security R&D BudgetJanuary 28, 2004 •

by Scott Bekker

More of Microsoft's $6.8 billion research budget will be directed toward making its software more secure and reliable, chairman and chief software architect Bill Gates said at a European technology conference."For Microsoft, security will continue to be our top R&D investment for years to come," the Reuters news service reported Bill Gates as telling industry experts at a Microsoft conference in Prague.

Filed under: Business, Windows, Google, MicrosoftMicrosoft has a $7.5 billion budget for R&D in 2007by Chris Gilmer Oct 18th 2006Microsoft is pumping up its research and development next year according to Steve Ballmer.

A step up to $7.5 billion--$1.3 billion more than the previous budget announced in May--comes in a move straight from investors who are worried about Google's lead in the marketplace. This R&D budget will most likely be used to steal recruit talented staff that can help support innovation in research laboratories in India and China, as well as in the US.

In our previous post “Microsoft is Fooling Itself” there is reference to the fact that Microsoft spent approximately $5-6 billion to create Vista. This has resulted in little innovation and a mediocre response from consumers. Although Microsoft controls approximately 80% of the operating system market share, only 17% of consumers use the Vista system. According to reports approximately 65% use the older version of Windows XP. Therefore, the result, Microsoft spent $5-6 billion to have its consumers primarily remain with an older product as opposed to changing to “new” innovation.

Despite deploying billions on Research and Development for operating systems, the company is losing market share to competitors such as Apple. Its massive Research and Development expenditure has failed to create innovation and satisfy or win customers.Since 2000, Microsoft has deployed over $40 billion in capital on Research and Development.

Ballmer Spotlights R&D at Microsoft Shareholder MeetingNovember 19, 2008 • by Kurt Mackie

The theme of the meeting, if there was one, was an appeal by Microsoft to preserve its long-term investment initiatives, particularly its research and development spending.

"Our strong financial position allows us to reinforce our competitive advantage by continuing to invest in R&D, continue to make carefully targeted acquisitions and continue to take a long-term view of the investment required for future growth," Ballmer said.

He said that Microsoft is also looking at reducing its costs, utilizing its resources more and "reducing the head count for this financial year and the next financial year." However, its R&D investments will continue.

View the entire article at:


In November 2008, Mr. Ballmer announced Microsoft was going to continue with its previous "strategy" of spending on Research and Development. Mr. Ballmer stated "investing will reinforce the company competitive advantage". However, despite massive R&D expenditures the company has subsequently failed at remaining competitive.

According to Microsoft annual reports the company in 2000 generated $22 billion in revenue and $9 billion in net income.

In 2001, the company generated $25 billion in annual revenue and $7 billion in net income.

In 2002, Microsoft generated annual revenue of $28 billion. The company generated approximately $8 billion in net income.

In 2003, the company generated $32 billion in annual revenue and $7 billion in net income.

In 2004, the company generated $36 billion in revenue and $8 billion in net income.

In 2005, Microsoft generated $39 billion in revenue. The company had net income of $12 billion.

In 2006, the company generated $44 billion in revenue and $12 billion in net income.

In 2007, Microsoft has revenue of $51 billion. The company had net income of $14 billion.


These figures were obtained from Micosoft Annual Reports within its Investor Relations section of its website.


Revenue...........................................Research and Development

2000..............$22 billion.................$4.38 billion

2001..............$25 billion..................$5.2 billion

2002..............$28 billion...................$5.8 billion

2003..............$32 billion...................$6.4 billion

2004..............$36 billion...................$6.8 billion

2005..............$39 billion...................$6.8 billion

2006..............$44 billion...................$6.2 billion

2007..............$51 billion....................$7.5 billion

Based on the above chart, it appears evident that approximately every dollar increase in revenue from period to period, Microsoft is required to spend an equivalent amount on Research and Development.

In most periods, Microsoft deploys a higher amount of capital on Research and Development than the revenue generated in the next period. For example, in 2000 the company deploys $4.38 billion on Research and Development. However, the company increases revenue from $22 billion in 2000, to $25 billion in 2001. It spent $4 billion on R&D and increased revenue by $3 billion. In 2003, it had annual revenue of $32 billion and spent $6.4 billion on Research and Development. In 2004, the company revenue was $36 billion. Despite spending $6 billion on R&D, the company increased revenue by $4 billion.

This information demonstrates that Microsoft through revenue growth is required to deploy an equivalent amount of capital in the previous period on Research and Development.

Perhaps the most effective and direct way to address this dilemna is reiterating ourselves with a previous comment from a former Microsoft employee:

Word from a developer at Microsoft (me):

We spend less than 5% of our time coding. All the other 95% is around the process and saying the same story time and again for an immense number of managers.Then if you consider that MS has 19000 managers and 12000 engineers (yes, more managers than engineers), and only 1/2 of those engineers are developers, you get the conclusion that of all operational expenditures on salaries only 0.3% goes towards coding. All the other 99.7% is waste: process and management.So right there you see how we spend billions in R&D, countless years to build Vista and other without results.

The charts reflect this comment from a former Microsoft employee. Therefore, despite Microsoft being required to deploy a dollar in Research and Development for every dollar generated through revenue, Mr. Ballmer announced in November 2008 "we are based on our financial position going to reinforce our competitive advantage through Research and Development investing".

This "strategy" has failed to utilize capital to maxamize revenue growth. Despite the massive expenditure the "strategy" has failed at enabling Microsoft to remain competitive. It has lost marketshare in Operating Systems. It has lost marketshare in online services to Google. It is also failing to remain competitive with Apple and RIM within the handheld sector.

Numerous shareholders have expressed frustration with Microsoft deploying capital for share buybacks. As mentioned in previous posts, Microsoft has stated that it has since 2004 deployed $115 billion on share buybacks and dividends.

In a February 2008 article titled "A Yahoo White Knight Emerges!Microsoft Shareholders", in the comment section a shareholder states:

You left out the possibility that MSFT could simply take out more debt, and change the cash/stock mix to get back to $31. Frankly, as a MSFT shareholder, that's what they should have done in the first place, rather than saddled us with the dilution and downward stock spiral that you allude to. And btw, I'm against the deal as it sits and agree that your suggestion would be better. Unfortunately, it sounds like YHOO rejected those discussions throughout the past year. Which was incredibly stupid of them.

According to a September Marketwatch article by Dan Gallagher it states:

SAN FRANCISCO (MarketWatch) - Microsoft Corp. announced a share buyback Monday morning worth $40 billion - the largest on record for a repurchase deal - following a week of turmoil on Wall Street.

The software giant was one of a trio of major U.S. companies to announce large-scale buybacks Monday, with Hewlett-Packard Co. and Nike Inc. joining the fray.

Redmond, Wash.-based Microsoft (MSFT:
Microsoft Corporation

Sponsored by:
MSFT 19.82, +0.35, +1.8%) unveiled a program to buy back up to $40 billion in stock. The new program replaced a previous one, now completed, and will run through September of 2013.

The entire article can be viewed at http://www.marketwatch.com/news/story/microsoft-sets-largest-ever-buyback-plan/story.aspx?guid=%7b5284D06B-CAA

An article posted September 2008 at Tech News Review states:

Microsoft unveils $40bn buy-backMicrosoft has unveiled plans to spend $40bn (£22bn) buying back its shares from investors, the biggest single buy-back plan in history.

Analysts say the move is an attempt by the software giant to use its spare cash to prop up its share price which has fallen by almost 30% this year.

Since 2004, Microsoft has engaged in a "strategy" to buyback company shares. Despite deploying tremendous amounts of capital on this initiative it has failed to elevate the share price. Reflected in the above chart, the share price has remained relatively flat for a "long-term".

Therefore, this "strategy" of deploying capital to enhance the share price has proven ineffective. Despite the failure of this strategy, Mr. Ballmer has announced the company intention to continue with this "strategy" and deploy an additional $40 billion towards the "strategy" of share buybacks.

In a November 9, 2004 article called "Shareholders rubber- stamp Microsoft payout", Ina Fried reports on the annual shareholder meeting. Within the article a shareholder presents a question concerning the share price. We have included the response by Mr. Ballmer and Microsoft:

The company was also queried about its stock price, which has hovered in the same range despite the company's growth in profits and the plans for the cash payout, stock buyback and boosted dividend. On Tuesday morning PT, the price stood at $29.51.

"Our stock has been flat for four years," said one shareholder, noting that the enthusiasm and energy of executives has not translated into stock growth.

Chief Financial Officer John Connors commiserated with shareholders. "Obviously we have been in sort of a stagnant, narrow range for a while."

Ballmer offered his own take. "We don't surprise anyone numerically very often," he said. Much of the company's profit improvements in the past few years may have been priced into shares, but if the company can do all the things it has planned, it will be able to achieve further growth, he said.

"If that all happens, the stock price will take care of itself," Ballmer said.

In 2004, at an annual shareholder meeting, Microsoft is presented with the question of explaining the share price. Its recognized that the company is not a growth stock.

The company CFO states "we have been in a stagnant, narrow range for a while" and Mr. Ballmer states " if things go according to plan the stock will take care of itself".

These statements are extracted from a 2004 annual shareholder meeting. Both the company CFO and CEO acknowledge that the shares have been flat for "FOUR YEARS". However, the response is that "if things go according to plan the stock will take care of itself".

The plan has included a proposed share buyback plan. This amounted to $40 billion. It involved increasing R&D spending. It included offering a premium $45 billion bid for Yahoo.

Fast forward four years, we are at a 2008 annual shareholding meeting and the shares are still trading at the same level. We have witnessed another "FOUR" years of stagnant price, and narrow range.

It appears evident that the plan failed and the shares didn't take care of itself.

It appears that it equates to a total of "EIGHT YEARS" of stagnant share prices, and narrow range. The tragedy, Mr. Ballmer and management have announced "PLANS" to proceed with the same "strategy".

How long will shareholders be required to watch these "strategies" that fail to create shareholder value?

Will reports in four years during a 2013 shareholder meeting indicate that Microsoft spent $40 billion on share buybacks and the stock is still "STAGNANT"?

In four years will Mr. Ballmer and the CFO state "if things go according to plan..the shares will take care of itself"?

The entire cnet article can be viewed at http://news.cnet.com/shareholders-rubber-stamp-Microsoft-payout/2100-1014_3-5444986.html

Microsoft Announces Deal with Verizon

After a reportedly grueling two-year negotiation, Microsoft is partnering with Verizon to offer several Live services -- search foremost among them -- and advertising to the wireless carrier's roughly 80 million U.S. subscribers. (With its acquisition of Altel, Verizon is expected to edge out AT&T this week as the largest U.S. wireless carrier.)

The five-year deal, on new Verizon Wireless phones, includes a customized mobile version of Live Search, including local and location-aware search; access to the MSN portal; and Microsoft management of search and display advertising for Verizon. Microsoft apparently beat out Google for this deal, too. The Wall Street Journal reported in November that Microsoft was offering Verizon guaranteed search advertising revenue of between $550 million and $650 million over the life of the deal, roughly twice what Google was offering. Others have suggested those figures were inflated.

Microsoft did not comment on the financial terms of any of its deals. "All these deals have economics," Robbie Bach, president of Microsoft's Entertainment and Devices Division said in an interview this afternoon, "so I'm not going to say that there's not economics involved because of course there is, but the logic behind the deal for us is, the mobile search and advertising business is a very large opportunity and it's very early in the process of defining what it is. ... The challenge, and what will determine our success, to me, isn't necessarily the underlying economics, per se, but it's do we find the right experience for people for search on a mobile phone?"

Analysts had parsed a potential Microsoft-Verizon deal, at $500 million, as a strategic market-share play, rather than a grab at profits -- which will may be tough to come by via the nascent, but promising, mobile advertising business. Citi analyst Mark Mahaney calculated in November that Microsoft would need each Verizon customer to conduct 17 searches a month on average to break even on the deal. (Via Tricia Duryee at mocoNews.net.)

Rumor Mill: Google Acquiring Sprint Recent news that Sprint is not going to work with Clearwire to build out a WiMAX network only added to the rumors I have been hearing about Google acquiring Sprint Nextel. On the surface it seems like this would be a bad move for Google but in reality the world’s leading search engine has become so much more than just a website to go to when you want to find a trinket of information… The company now needs a wireless network to allow it to grow in the mobile search and related spaces such as watching YouTube videos on the subway.

Let’s look at Google from a philosophical level. The company has built almost everything from scratch in its past and present. Computers, operating system, web server software and more. Google likes to have complete control. In a way this is not unlike Apple. So one wonders if the mobile search market is so crucial to the company’s future, can it rely solely on the Open Handset Alliance to get into the mobile search market?

Look at it this way... When Google decided it was serious about the video space it launched a new tab titled video on its home page. At a certain point the company realized YouTube was too strong a competitor and Google threw in the towel and purchased the video competitor. So one wonders if history may indeed repeat itself and Google will start with the OHA and decide soon they need an acquisition to boost their presence in the space. Of course one problem with a Sprint Nextel purchase is that the company’s network isn’t GSM-based meaning devices will have to have multiple radios to be used around the world. But this is a minor problem; let’s look at the more serious issues such a transaction would pose.

1) Google gets into the messy business of telecommunications. I don’t mean to say Google’s day job is easy but the telecom market gets it involved with government agencies like the FCC on a more regular basis. Like many other large telcos the company will have to spend more and more money lobbying and technology differentiation may be less important than government regulations in ensuring future success.

2) Getting seriously into the telco business and having a corporate motto “Don’t be Evil,” may be tough to pull off.

3) Retail stores. Google’s investors love the fact that Google has a massively scaleable business model which can grow with the addition of servers. Imagine if Google had a slew of retail stores to deal with around the country (or world?). Google’s valuation would likely take a major hit.

4) Open Handset Alliance: One would imagine if Google owns its own network, other network operators would not be too happy to be part of the OHA. This could slow progress for Google getting on the handsets of other wireless service providers.

5) A purchase of Sprint Nextel would make Verizon and AT&T go crazy and they would make life even more difficult for the search leader. Could they make life any more difficult than they do today? Maybe. But for a company that craves control as much as Google there may still be a way to acquire Sprint without destroying their relationship with other providers. You see, Google doesn’t really need the messy wireless phone business.

What they really need is platforms which will allow them to display ads embedded in their services such as maps, videos, etc. Google could buy Sprint Nextel and in a complicated maneuver spin it back out as a different company (perhaps a nonprofit) which agrees to work more closely with Google to display ads and distribute its applications. This would allow Google to stay somewhat independent and work with other service providers worldwide. Another more drastic move would be to buy the beleaguered wireless phone company and start giving all service away for free. In addition the company could reinitiate the ClearWire talks and work with this company and others to blanket the world with a free (or at least ad-subsidized) WiMax network.

This sort of move is logical from a local search perspective. Imagine Google being able to light up your phone with information relative to where you happen to be. Think about the phone as a virtual tour guide. When you get a phone call from someone, the phone could pull up a MySpace or orkut page before the phone even rings. If the caller ID is blocked when receiving a call, you could see the results of a web search of the phone number as the phone rings. When you are walking past a coffee shop a coupon for 10% off any drink with a European sounding name could be displayed on your phone. It gets better… McDonalds could flash ads for $2-off any meal with more than 1,000 calories in total.

Of course I am kind of kidding about this last point but we should all realize the web is beginning to have more of our preferences stored in it somewhere and Google could indeed ferret out our likes and dislikes and match them up with ads from relevant companies in a way we never thought imaginable. I for one would be very excited to see what a Google phone might look like five years from now. Sure Apple is the reigning king of design but Google is the same in the world of information organization. I do wish someone would cross the chasm between my desires and my surroundings. I think Google with a cell phone provider under its wing can be the company to pull this off. So do I think Google will make such an acquisition?

Microsoft has invested enormous capital to enhance its marketshare within the handheld sector. However, despite this massive spending the company has failed to remain competitive.

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.

As mentioned within this post, Mr. Ballmer announced a deal with Verizon. According to Citi analyst Mark Mahaney, Microsoft requires each Verizon customer to conduct 17 searches per month for Microsoft to recover its investment.

In 2008, prior to launching this "New Strategy" campaign, we forwarded letters to Mr. Ballmer stating that the company should acquire Sprint. We stated that the company should not be content with conducting deals with telecom companies when Microsoft has the financial capacity to acquire a company and dramatically enhance revenue.

Will Google through acquisition acquire Sprint and through this acquisition secure marketshare from Microsoft?

Microsoft currently has approximately $25 billion in cash. The company according to its 2007 Annual generated approximately $17 billion in net income. Therefore, Microsoft should engage in more effective utilization of its capital and pursue acquisitions that will enhance marketshare and revenue.

Microsoft through its "Old Strategy" has since 2000, deployed $40 billion in Research and Development. The company has deployed an equivalent amount on share buybacks. Both of these "Old Strategies" have failed to enhance the company competitive advantage, propel growth and enhance share price.

Based on historical data and information and concerns from shareholders, analysts and reporters, we created a "New Strategy" for Microsoft. It involves diverting from failed "strategies".

It incorporates adopting "strategies" that would exclude share buybacks. This strategy has wasted capital on a initiative that fails to enhance shareholder value.

It involves diverting tremendous capital from R&D, that according to Microsoft employees is a waste of capital. It includes utilzing its cash to enhance revenue and growth.

Numerous analysts refer to Microsoft as a utility. This is based on the company inability to present characteristics of growth potential. Our "New Strategy" involves creating product mix to establish new services and produce synergies with existing divisions.

Numerous analysts are concerned that Microsoft is losing marketshare within its Operating System division. The concern is compounded with the company potential inability to replace the loss in marketshare and revenue.

As mentioned in a previous post, 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?

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.

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?

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.

Therefore, despite failed strategies of share buybacks elevating share value, Mr. Ballmer has announced a "Strategy" to deploy $40 billion in capital.

Microsoft has engaged in massive Research and Development expenditures. These annual expenditures have failed to create "innovation" and provide the company with either solid revenue growth or a competitive advantage.

Microsoft intends to within the next four years deploy approximately another $40 billion on Research and Development. Based on historical data this has failed to prove beneficial to the company.

Microsoft intends to deploy another $40 billion on share buybacks in a effort to create share value. However, this "Strategy" has failed to instill investor confidence and create shareholder value.

In the next four years Microsoft based on historical records of spending and revenue growth has the potential to increase revenue to $80 billion. However, this is contingent on its ability to maintain marketshare in existing areas of operation. Based on data and analysts, there is the potential for Microsoft to surrender marketshare to competitors, and therefore expereince a decline in annual revenue.

It is time for Microsoft to abandon its "Old Strategy" and pursue a "New Strategy". Subsequently, we compiled information and data and created a "New Strategy" for Microsoft.

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.

This strategy would provide Microsoft with additional revenue. It will enable the company to aggressively enter the consumer and commercial finance sector. It will enable the company to have access to numerous commercial and consumer ING customers. This will enable Microsoft to offer "rewards" and cross-promotion services to ING consumers.

Hypothetically, a commercial ING client has the ability to secure "rewards" towards Microsoft office and operating system software. This would enhance the value of Microsoft divisions. It enables other divisions, such as operating systems, have more appeal to consumers.

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.

This "Strategy" enables Microsoft to secure Sprint consumers. It provides Microsoft with direct access to Sprint customers. It also provides Microsoft with an additional $40 billion in annual revenue.

It enables Microsoft to offer Sprint customers cross-promotion to Microsoft or ING products and services. Therefore, the corporate client that uses ING has access to products offered through Microsoft divisions and Sprint. A corporate client secures financing and loans from ING. It through "rewards" obtains products such as Operating Systems. It also has the potential to through cross-promotion secure handheld devices for its employees with Microsoft software and applications available only through Sprint.

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.

Through the "Old Strategy" Microsoft will continue to deploy capital towards R&D, and share buybacks. It will potentially lose additional marketshare to competitors. It will potentially continue to remain a "Dividend" company with minimal opportunity for growth. It will through share buybacks, deploy capital in a failed effort to increase share prices and create shareholder value.

Through the "New Strategy", the company will deploy capital towards acquisition growth. It will obtain a major bank and create the opportunity for cross-promotion and growth.

Microsoft acquires Sprint. Through this acquisition the commpany secures consumers and provides the opportunity for cross-promotion and the ability to enhance handheld services and marketshare.

Microsoft pursues a "search" only deal with Yahoo. This "New Strategy" enables Microsoft to increase marketshare within the online division. The acquisition will increase the value of MSN and enhance the company brand.

The "New Strategy" through cross-promotion enhances the company brand and potentially consumer loyalty. It increase revenue to exceed $300 billion annually. It provides $30 billion in net income. It provides the company with additional growth potential within divisions of operation. The "New Strategy" through acquisition growth and cross-promotion has the ability to increase Wall Street and investor confidence in the company and subsequently increase shareholder value.

The "New Strategy" has the greater ability to create shareholder value based on capital deployed as oppossed to the "Old Strategy" and subsequent "Current Strategy" of share buybacks and massive R&D expenditures.

It is time for a "New Strategy" for Microsoft. Based on the "Old Strategy", Microsoft will through till 2013 deploy $40 billion on share buybacks. Within the same period, based on reports it will potentially also deploy $40 billion on R&D. However, through deploying approximately $80 billion in the next four years what value will be created?

How much annual revenue will be added in the next four years?

Will $80 billion in capital expenditures have the ability to generate annual revenue that exceeds $100 billion?

Will this expenditure within the next four years maintain growth?

If it creates revenue growth, what is the value created based on $80 billion spent?

As mentioned, will Mr. Ballmer and management present the same answers at the 2004 shareholder meeting in another four years at the 2013 meeting. When asked about growth, the company "Plan" and most important the share price, will Mr. Ballmer state "the shares have been stagnant...but..we have a PLAN...and the shares will take care of itself"?

Therefore, which "strategy" makes more sense and creates greater return on investment or capital deployed?

Microsoft can continue with the "Old Strategy", this equates to $80 billion in four years. At this time will the share price have increased from its historic "long-term" level?

Will the investment create any long-term shareholder value and elevate the share price?

The "New Strategy" involves deploying approximately $40 billion in acquisition growth. It involves spending less than the bid for Yahoo. Through deploying $40 billion it enables Microsoft to increase annual revenue to exceed $300 billion annually. It enables the company to generate $30 billion in net income. It also through cross-promotion creates unmeasureable value to current divisions through synergies.

Microsoft through the "Old Strategy" will probably survive. However at what cost?

How much marketshare will be lost in current divisions?

At what price will the company shares be trading in four years?

Perhaps this comment from a former employee summarizes the "Old Strategy" and "Current Strategy":

I look forward to the day I leave Microsoft, or the day Ballmer does. Until then I can't stop caring how we do and every day it kills me a little more watching this once great company rot.

How long will shareholders allow the company to continue to rot?

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