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.
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
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
"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 "
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.
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.
Our question is SIMPLE...AS A SHAREHOLDER WHICH "STRATEGY" WOULD YOU CHOOSE?
BASED ON THE COMPANY PAST PERFORMANCE, THE OLD STRATEGY WILL ONLY CONTINUE TO CAUSE A DECREASE IN SHARE HOLDER VALUE.
IT IS TIME FOR SHAREHOLDERS TO RALLY SUPPORT AND EFFECT CHANGE BEFORE SHAREOLDERS WITNESS CONTINUED LOSS TO SHAREHOLDER VALUE.
We can be contacted at email@example.com