Thursday, February 26, 2009

Microsoft Shares Fall Lower

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".

In 2004 the CFO recognizes that the shares have been stagnant and in the narrow range for a while. (Shares had been stagnant since 2000). Refer to chart at Microsoft SubNet located at

Despite the shares being stagnant and in the narrow range Mr. Ballmer states "if things go according to plan the stock will take care of itself".

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 Mr. Ballmers statement "if things go according to plan the share will take care of itself”, the shares have failed to create value.

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. The company offers a 65% premium valued at $45 billion.

Spending your capital to buy back shares indicate that a company has no "Plan" to use that capital to build the business. 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.

In 2004, Mr. Ballmer states that given the company’s growth prospect we will increase share buybacks. Since 2004, the company has spent $115 billion on this strategy. In 2008 the shares continued to trade at the same 2004 level of $25 per share.

The company P/E is currently at 10. This reflects Wall Streets lack of confidence in Microsoft’s growth prospects. Analysts have for several years referred to Microsoft as reflecting a utility company, its well suited to generate steady cash flows and dividends, BUT NOT GROWTH.Therefore, were is the growth that Mr. Ballmer was refering to?
Perhaps this is why Wall Street refers to the company as a utility.

In a Microsoft SubNet article located at Pacific Crest Securities analyst Mr. Barnicle states that the shares are stagnant for two reasons. Mr. Barnicle states that the main problem is the company image damaged by products such as Vista. The second problem according to Mr. Barnicle is ""It was a huge growth stock in the 1990s and it has experienced multiple compressions year over year. …Yeah a lot of people are frustrated … the stock should have grown".

Since launching this campaign for a "New Strategy" Microsoft has lost approximately $80 billion in market valuation. To be kind to Mr. Ballmer it can be argued that numerous companies have recently experienced a decline in market value. However, this doesn't negate the fact that from 2000 to 2008 the company shares have been "stagnant and in the narrow range".

BUT, according to Mr. Ballmer "if things go according to plan the shares will take care of itself".

In a Microsoft SubNet article titled "Angry shareholders say Microsoft squanders billions", long-term shareholder Mr. McDonald states " By now it should have been $100+ per share. We've seen Apple rise and I remember when MS was handing out Apple oxygen because we didn't know if it would survive". Based on this comment perhaps Apple should be handing out oxygen for Microsoft.

It is time for a "New Strategy". If Mr. Ballmer continues with his "Plans" for the company the shares "will take care of itself" and in four years be a single digit share price.

It's time to rally support and effect change.

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