Friday, August 11, 2006

Something Rotten in the State of Denmark?

I promised to look into the $20B modified Dutch auction buyback recently announced by MSFT, before commenting further. Since that time, I've reviewed several articles which discussed the mechanics of the upcoming auction including:

Opinions run the gamut from:

The Dutch auction was surprising and certainly welcome.


But for shareholders seeking an exit strategy after years of stagnant stock prices, it's a chance to reboot.

Unfortunately, none of the articles speculate on why MSFT chose this particular vehicle for doing the buyback. Additionally, I've seen a lot of shareholder confusion on various message boards, including folks [incorrectly] stating that if you don't respond to the tender, MSFT will sell your shares [they can't/won't]. Supposedly, all shareholders of record received an information package from MSFT, but I hadn't, nor could I find it easily on MSFT's main IR page or even under the "stock info" sub-heading. Indeed, I ended up having to contact IR by email, who then notified me that the document could be found under "SEC filings" - where it can be, albeit that the title is cryptic. Another theme expressed by shareholders on several boards was that the tender "puts a cap on MSFT" until August 17th (the tender close date). Frankly, I don't see how that's the case. If anything, the auction puts a floor under MSFT by providing a minimum bid. Nothing prevents MSFT stock from going above the $24.75 upper threshold - except the lack of buying interest that we've seen for 3 years and especially this past one.

So back to "why did MSFT choose this option?". I'm not sure. MSFT says that they're not focused on the stock short-term and instead are focused on long-term returns. Using those criteria, the best interests of shareholders are served by MSFT retiring the maximum amount of shares at the lowest possible price. However, the auction's immediate impact was to make the stock jump, raising a question mark about whether it will even get filled given the [now] modest premium to market. MSFT could have simply announced a further $20B buyback and then executed it more aggressively than folks might have expected. That would seemingly have avoided the pop and given MSFT the chance to buyback more shares, cheaper. Perhaps the concern was transparency and wanting to avoid surprising analysts (well, at least not again given the most recent $60B "disconnect"). Alternatively, maybe the answer is that MSFT didn't want to be in the market every day for an extended period (to complete the buyback without running up the stock). But that one is pretty weak given that MSFT has been in the market doing massive buybacks for some time and the stock has only continued to fall. Meanwhile, Gates - who had atypically missed his normal selling this past quarter - is back to dumping large amounts of shares in advance of the tender. He's joined by others such as H&E honcho Robbie Bach. Both continue to hold considerable amounts of stock, but it still seems interesting that they'd be unloading at this time. It kind of negates the company message that "management wouldn't be participating in the tender", which was meant to indicate bullishness. No, they'll just sell outside of it and at prices below the upper range, instead.

Bottom line, I think the auction was aimed at putting a floor under the stock and to appease institutional shareholders by doing a large (though not as large as was generally desired) immediate buyback. While it's welcome, and (if successful) will help reduce the bloated float of the company following several stupid splits (especially the last one), it really changes very little. Buybacks today are simply MSFT's way of manipulating earnings to try and make them appear better than they are and telegraph bullishness to an increasingly skeptical and bearish market. Real earnings growth will still be relatively flat; emerging businesses will still be losing tons of cash; the company will still be visibly hitting on only half its cylinders. So, unless the market is in rally mode following August 17th, I would expect the stock to drop once the tender closes and that floor is removed. It will also be interesting to see whether the tender gets filled. I suspect MSFT did its homework and that it will. Otherwise, they're going to look foolish and have to do something else. But after all these manipulations are done, it'll be back to the same old question: can management accelerate real business earnings and if so, when? My guess: '08 at the earliest. Given that it was meant to be '03, '04, '05, '06, there should be no surprise if many investors conclude that '08 will become '09, 2010, etc. and/or that the continued wait just isn't worth it.


  • I hope you know that the people of Denmark are not Dutch :-)

    By Anonymous Anonymous, at 2:40 PM  

  • Yes, I was using some literary license there.

    By Blogger MSFTextrememakeover, at 4:17 PM  

  • Even after the current buybacks, there will still be over 8.5 billion shares outstanding. The stock is going nowhere.

    By Anonymous Anonymous, at 5:30 AM  

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