Microsoft, With Bond Sale, Further Signals Its Maturity
May 11 2009 - 4:56PM
Dow Jones News
Microsoft Corp. (MSFT), once a rebellious teen, has entered into
full adulthood with its first-ever sale Monday of long-term debt,
the latest signal of the 34-year-old company's maturity.
Microsoft, not historically shy of spending its own cash flow,
is now taking advantage of interested debt markets and its AAA debt
rating to raise money easily and cheaply, and then presumably using
that money for boring, shareholder-friendly moves like buying back
stock.
The move is akin to a freespending adult deciding to settle down
by buying a first home, instead of going on another high-priced
vacation that brings short-term pleasure but no long-term
growth.
"Microsoft has gone from being a growth company to being a
mature company," said Jay Anand, a professor of corporate strategy
at the Fisher College of Business, Ohio State University.
Shareholders have long given up on Microsoft as a high-flying
tech growth company. For the past seven years, Microsoft shares
have rarely been above $30, except for a five-month stretch at the
end of 2007 and beginning of 2008. And, since late October, they
have struggled to get above $20.
That is in sharp contrast to the stock's nearly nonstop rise
between its initial public offering in 1986 to 2000, when it peaked
at nearly $60 on a split-adjusted basis.
The tech bubble burst earlier this decade, and Microsoft shares
slid. The Redmond, Wash., company took a step toward maturity in
2003, when it began to pay a dividend - typical behavior for
companies no longer expecting rapid revenue and stock price
growth.
While Microsoft hasn't delivered returns in its stock price, the
company does generate cash. Microsoft registered $60 billion in
revenue in 2008 and has more than $25 billion on its balance
sheet.
That's why it is so notable that Microsoft has said it plans to
use the proceeds from the debt sale for general corporate purposes,
including buying back stock, a shareholder-friendly move because it
could improve Microsoft's sagging per-share earnings and stock
price.
Microsoft shares are cheap. They trade at a valuation - 11.4
times current earnings - that is notably below peers Oracle Corp.
(ORCL), 13.3; Adobe Systems Inc. (ADBE), 19.2; and Google Inc.
(GOOG), 21.3.
While selling cheap debt to buy back stock makes financial
sense, it doesn't solve Microsoft's fundamental problems - last
month, Microsoft posted a 32% drop in net profit and the first
quarterly revenue decline in its 23-year history as a publicly
traded company. The move, though, does buy Microsoft some time.
The company's key franchises, the Windows operating system and
the Office business tools suites, have high market share - Windows
is on over 90% of the world's computers. But Microsoft has seen
increasing challenges to its dominance in recent years.
The largely negative critical reaction to Windows Vista, the
current version of the operating system, underscored that the
company can't automatically rely on its customers to upgrade
whenever a new version of its operating system software comes
out.
Meanwhile, competitors such as Google, Apple Inc. (AAPL)
Salesforce.com Inc. (CRM) and Amazon.com Inc. (AMZN), all of whom
offer alternatives to the Microsoft operating system and tools, are
gaining traction among consumers and corporate customers.
For those reasons, some suspect Microsoft's debt offering may be
a prelude to a more significant move to improve the company's
momentum.
Walter Pritchard, an analyst with Cowen & Co., thinks
Microsoft is "testing the water", and he can't rule out a larger
debt sale later that could be used to fund acquisitions. German
software maker SAP AG (SAP) and Yahoo Inc. (YHOO) have been
mentioned as possible targets.
But at the moment, Pritchard says, the move should be seen as
Microsoft "growing up from a capital expenditure perspective," like
the rest of the software industry.
"[Software is] not typically a very capex intensive business,
and there's historically been an attitude that debt is bad," he
said. But software peers, including Oracle and Adobe Systems, have
become more comfortable with debt in recent years.
-By Jessica Hodgson, Dow Jones Newswires; 415-439-6455;
jessica.hodgson@dowjones.com