By Rick Aristotle Munarriz
Microsoft (Nasdaq: MSFT) has finally found a company that won't say no to its amorous advances -- itself. The world's largest software company announced a $40 billion share repurchase this morning.
It's aggressive. It's confident. It's also stupid.
Don't get me wrong. I love share buybacks. Open-market purchases help support a stock price. Eating away at a company's diluted share count is a great way to improve earnings on a per-share basis.
I will praise a company's decision to use its greenbacks to put its money where its mouth is 99% of the time. At a time like this, when money market funds and short-term instruments are yielding a pittance, it just doesn't make sense to keep good money dormant. However, Microsoft is different. It's under attack. Its future is uncertain. That money is better used as ammo than price-supporting trickery.
In the money, honey
With more than $20 billion in cash and short-term investments in its coffers at the end of its latest quarter, it's not as if the company has a blank check for the $40 billion buyback. This doesn't mean that Microsoft isn't good for the money.
The last time Microsoft announced a $40 billion repurchase, during the summer of 2006, it had $34.2 billion in the bank. It didn't complete the buyback right away. It went with a tender offer for half of the sum right away, but took the next two years to complete the balance.
Work the math, and you can see that Microsoft is a well-oiled cash-generating monster. However, it's also dealing with around $13 billion less in the vault. There is no way it will just throw $40 billion at the market in buy orders in the near term.
This morning's move comes with the company authorizing debt financings for as much as $6 billion, but does anyone think that the company that once had the most cash-rich balance sheet is about to become a leading debtor? Microsoft isn't going to let that happen. However, it is going to let Yahoo! (Nasdaq: YHOO) get away.
Say goodbye to Microhoo
Microsoft made a ridiculously overpriced stab at Yahoo! back in January. Yahoo! did it a huge favor by turning it down. However, now that Microsoft could probably get away with picking up Yahoo! for roughly two-thirds of what it ultimately offered, it's eliminating its ability to go bargain hunting.
Microsoft will never be able to take on Google (Nasdaq: GOOG) organically. Hooking up with Yahoo! would have given it less than half of Big G's market share. It would have been a nice start, though, in a lucrative, high-margin area.
Rather than simply return $40 billion to its investors, $30 billion -- or even as much as $33 billion to $35 billion -- would be a better investment in a fixer-upper like Yahoo! If Yahoo! is too big a purchase, Microsoft could have embarked on a buying spree to pick up several meaty pieces to remain relevant in the future.
* Salesforce.com (NYSE: CRM) would make Microsoft a leader in enterprise software cloud computing.
* VMware (NYSE: VMW) is a bargain these days, at less than last year's IPO price, and would be a huge boost for Microsoft in the fast-growing virtualization software niche.
* Research In Motion (Nasdaq: RIMM) would seem like a left-field purchase, but nabbing the BlackBerry parent would find it in a better position to take on the iPhone -- put out by its other major threat after Google -- in the smartphone market.
* Take-Two Interactive (Nasdaq: TTWO) is ripe for a buyout, and would give Microsoft the ability to take its Xbox 360 to the next level by making Take-Two's marquee titles proprietary Xbox titles.
Can some of these deals still happen, even with a gradual $40 billion buyback in the works? Of course. However, Microsoft can no longer be as aggressive. It could have bought Take-Two, VMware, and Salesforce combined for less money than the buyback. It could have purchased Research In Motion, but mega cash buyouts will be off the table the moment that Microsoft begins buying itself instead of something else.
Money is important, Microsoft; or are you just going to throw it all away on more Seinfeld ads?
