Saturday, September 22, 2007

Change, or more of the same? It's up to YOU.

It's proxy season again. And thanks to new corporate compensation rules, you'll find more detail than ever in this year's document. For example, you'll learn that while CEO Steve Ballmer may have been unable to get the trains to run on time, invest in areas that actually return a profit, catch major new trends, restore confidence, or get this moribund stock moving despite record buybacks using our cash, he was paid less than most CEOs to do it. The Board, in their collective wisdom, think that constitutes being "underpaid". I think it proves the old adage "you get what you pay for"
The proxy also gives the deepest glimpse yet into the mysterious formulas and metrics which underpin the so-called Shared Performance Stock Award (SPSA), indelicately referred to as the "executive feeding trough" from time to time by a certain shareholder blogger. In particular, you'll learn that senior most leadership walked away with millions each, because the company aims to pay "above the median" for such top talent (read: way above). However, that was only half what they could have received. The Board, you see, may sit idly by as you and I continue to lose money on our investment. But they want you to know they're no pushover:

We were satisfied with our performance in product acceptance and SMSG and MBD financial metrics. Our performance in customer satisfaction, while steady, and Internet searches, while growing, fell short of our challenging goals, and we were not satisfied with our performance in EDD financial metrics.

BTW, that last one is a euphemism for "even we understand that we can't be seen to condone another $1B loss of shareholder cash - on top of the mind-blowing $5B lost so far - even though it resulted from a strategy we approved of rushing a product to market without adequate testing". Hmm...think that disappointment translated into maybe zero SPSA payout for H&E head Robbie Bach? Doesn't say. Here's my wild-ass guess: "No".

Steve and the Board also want you to know that part of the reason for the large compensation payments is too retain these key individuals. Apparently folks who collectively can't lead, execute, or inspire, are in high demand. Go figure.

Along the way you'll learn that the stock price is not part of the extensive SPSA metrics. What's that line again about "you get the performance you request and reward"? However, rest assured that the general Compensation Philosophy includes this objective:

provides a significant portion of total compensation linked to achieving performance goals that we believe will create shareholder value in the near and long term

Just in case the stock being down 50% since 2000 and having badly underperformed all major indexes and most peers this entire decade has caused you to er... maybe question the value of their beliefs?

Also, be advised that the massive insider selling which has become the hallmark of MSFT post 2000 - and a frequent topic here - has now caused sufficient embarrassment that the usual "we don't comment on sales by our executives" is no longer sufficient. From now on, executive officers will be forced to keep a multiple of their salary in company stock (3-10X base pay depending on level). Doesn't that just fill you with confidence that the supposed "creme de la creme" of MSFT management need to be forced to hold this stock? And don't worry about our fearless leader Ballmer:

Because his interests are already closely aligned with shareholders’ interests...

Again, in case that wasn't as um...obvious from the stock's decade-to-date performance as it might be.

Also intriguing is what's not in the proxy. If you're a regular reader of it, you'll recall this chart which has appeared annually and compares MSFT to the S&P and NASDAQ (apologies for the image quality):

Apparently, even the extreme creativity that has been used to draw the scale historically is no longer sufficient to mask the chronic underperformance. And since reminding shareholders of how badly they've done while detailing how much management got paid for doing it is bad form - not to mention potentially career limiting - POOF!it's gone. And with it, final abdication of responsibility by current leadership for the stock - something that's been evident for years, but is now seemingly official.

All in all, this proxy has all the spin, half-truths, non-sequiturs, outright fiction, and disdain for reader's intelligence worthy of say, a recent Vista "Momentum" press release. Since I want to be constructive, here's how we can radically improve and streamline it while also saving a few thousand trees. Instead of wasting pages and pages on excuses and justifications for lavish compensation in the face of abject failure on behalf of shareholders, simply provide us with one page containing two items: 

1) A 5-year stock chart comparing MSFT to the S&P and NASDAQ indices (drawn using normal scale):

2) A clear choice:

Simple, huh?

And for all those hotshot managers whom the Board is paying millions to because they're so worried about retaining them, and who have to be forced to hold the stock, I say "quit". PLEASE. In many cases, the best possible development for Microsoft would be to have some of you go to the competition and screw them up instead. I'll happily take some less-senior person who actually still believes in the company, has vision, and can inspire others.

Alternatively, if despite the demonstrated lack of confidence you're all truly convinced that your strategies - which the street hates - are actually brilliant, then march on down to your local bank consortium and pitch them on lending you $270B (less Bill & Steve's share if they're willing to go along), plus say a 20-30% premium. Then you can buy us out and take the company private. That way, if you continue to execute as you have, it will be coming out of your dime instead of ours.

Fellow shareholders, the ball's in your court. You know which way I'm voting.

Monday, September 17, 2007

No one survives the European Inquisition

Sorry to bastardize a line from Monty Python. But there's no way to sugar-coat it; MSFT got clocked in Europe today. That was a loss of staggering proportions. Where most had expected a split-decision - myself included, the Court of First Instance upheld virtually the entire EU Commission case:

The Court of First Instance essentially upholds the Commission's decision finding that Microsoft abused its dominant position," a court statement said.

As a result, the judgments on both bundling and interoperability information stand. As does the record fine. MSFT even gets to pick up 80% of the EUC's legal costs and that of several competitive rivals - or at least rival-backed lobbying groups (EUC picks up 20% of MSFT's costs). What I haven't seen covered is whether this is likely to open the floodgates to additional litigation/financial settlements with competitors in Europe (as it did in the US following the Final Judgment).

Caveat: I haven't read the detail of the Court's decision. Supposedly, MSFT will be still be allowed to improve its products. But when the court found no technical advantage to bundling Media player the way they did, you have to wonder how high the bar will be to add anything without a major fight from a further emboldened EUC. And make no mistake, they are that:

“The ruling confirms more than ever that Microsoft must comply,” said EU Competition Commissioner Neelie Kroes. “I will not tolerate continued noncompliance.”

Additionally, chances that Office and Vista - both of which are under investigation - will now be subject to further EUC demands and or charges seems like a foregone conclusion.

As readers know, I personally thought the European case was far weaker than the US one. Nevertheless, MSFT's legal team went down to total defeat. While they can still appeal to Europe's highest court, that is now restricted to much narrower rules of law only. It's TBD whether they will do so. If they're smart they won't. Which of course means...

Here's the current party line:

“I don’t want to talk about what will come next,” said Microsoft lawyer Brad Smith. “We need to read the ruling before we make any decision.”

EUC head Neelie Kroes is quoted as saying that her view of "success" [now] would be for MSFT's European marketshare to eventually drop to 50% or so. An aide later felt compelled to add that she meant "as a result of normal competitive forces". Sure.

Meanwhile, the stock is off $0.37 or 1.27% on decent but not spectacular volume (presently). The market appears to be trying to decide if this is at least short-term resolution - which they like, versus the beginning of the end for MSFT's dominant market position in Europe - which of course they don't like. Unless the US Administration brings some persuasion to bear to keep the EUC in check, MSFT - and possibly other dominant companies - are going to find it even tougher doing business in Europe. Oh well, at least we got that $0.10 dividend last week. Did you even have a chance to spend it yet?


Update: (related)



Thomas Barnett, head of the Justice Department's Antitrust Division, said the European Court of First Instance (CFI) in the case against the US software giant may do more harm rather good for consumers.


"Rather than helping consumers, (the decision) may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition," the US official said in a strong rebuke of the EU action.


Barnett said that in the United States, "the antitrust laws are enforced to protect consumers by protecting competition, not competitors" and that barring "demonstrable consumer harm, all companies, including dominant firms, are encouraged to compete vigorously."

Update #2 (9/19/07):

Joe Wilcox adds his two cent's worth on the potential implications of this ruling:

What the European Commission wants is the breakup of Microsoft without severing the business asunder.

Gives you the basic tone, if you want to save yourself the effort.

Paul Thurrott links to an interesting piece re: potential impact of this judgment for AAPL:

Update #3 (9/20/97)

Last one, I promise:

Thursday, September 13, 2007

Still searching for a dividend strategy

Okay, so I've posted before about MSFT's dividend strategy:

More specifically, their lack of one. I also noted in a recent post that CFO Liddell dropped some hints that led me to believe we'd see some changes:

He also seemed to foreshadow some improvement in the dividend strategy (which has been a total mess so far). Although he still expressed a preference for buybacks vs dividends.

Well, late yesterday we got MSFT's apparent first attempt at that. [note: someone might want to tell Investor Relations to update their dividend section since it still reflects the old info]. As we've come to expect from this leadership team, it was done in the usual clumsy, ineffective manner - at least if it was meant to communicate a move to a more serious, competitive, dividend strategy versus the previous hodgepodge. 

The actual announcement? Another .01/Quarter increase - just like last time. That brings us to .44 annually, or 1.51% yield at the current closing price. But due to the now higher share value, that's actually a lower yield than when MSFT announced the last dividend increase (1.51% vs the then 1.54%). It's also a smaller % increase on its own. Clearly, management isn't telegraphing much confidence in the future stock price despite its depressed YTD performance.

By way of comparison, INTC's current yield is 1.77% and IBM's is 1.6%. The S&P 500 average is 1.71% (2.2% if you count just dividend-payers) and the DOW 30 average is around 2.3%. In other words, even with this increase, MSFT's dividend lags behind the S&P 500 average, the DOW 30 average, and behind some of its equivalent tech peers - as it has since inception. But the "bonus" is that you get worse-than-market stock performance too! For example, down over 2% YTD while the NAS is up more than 7%, for a total 9% relative underperformance (7%, if you want to compare to the S&P).

If you're looking for a bright spot, I guess you hang your hat on the fact that a penny still represents a 10% increase. Also, that the announcement comes in the same month as last year (versus December previously). That and the same [nominal] increase, is at least a move towards some consistency. Of course if you're cynical, you could infer that MSFT management simply decided that dividend increases are one way to placate disappointed investors ahead of the annual shareholder's meeting. Now you see the pea, now you don't...

As posted above, Liddell (at least) still professes a preference for buybacks over dividends. I'm unsure why personally, and he's never elaborated. FWIW, I'm not against buybacks per se. My problem with the MSFT variety is that for most of their life they've gone to offsetting dilution vs actually reducing shares outstanding. They've been much more effective at the latter over the past 1-2 years, but MSFT can no longer sustain that pace without further reducing cash and/or doing what some Wall St. fund managers have actually suggested: taking on debt to do even larger ones. Buybacks also have an inherent risk that management will abuse them to game EPS or prop up the stock, rather than buying because they truly believe their shares are undervalued. Not that this team would ever do that, of course. Cough, cough...

Nevertheless, you can be confident there will be more buybacks, if only to offset ongoing dilution from management/employees and the increased supply in the market caused by Gates massive ongoing sales. Hopefully, we'll also see more dividend increases and an attempt to actually be on par with at least the average, if not true peers. While some will argue that MSFT should have better things to do with their cash than pay dividends or do buybacks, I say:

1) Dividends represent a significant % of the oft-quoted historical "market" return for equities

2) MSFT is still way over capitalized and kicking off far more cash that the business requires, especially the profit centers.

3) This leadership team has shown little aptitude for making wise investments with spare cash - quite the reverse, in fact.

Bottom line, I'll take the penny per quarter increase. Thanks. Maybe shareholders will almost break even on the stock by year end now. But MSFT needs to either get a competitive strategy in place for dividends asap, or rethink why they bothered to implement a dividend in the first place. Alternatively, the leadership team can just continue to do nothing and wonder why investors aren't particularly interested in a stock that has both below-market performance and a below-market dividend.


Update: OT to this post, but worth a mention. If you've been following the media fallout on this issue today, see MSFT's response here. Didn't resolve all questions, but nicely done. Kudos to Nate and his team for putting together a timely, comprehensive explanation while still acknowledging the need to provide greater clarity in future.

Monday, September 10, 2007

Walking the walk versus talking the talk

Mini-Microsoft has a very good post that reviews the recent Company Meeting. Looks like he came away happy with the content. Most interesting to me - and a seeming highlight for some others - was Steve Ballmer giving a speech where he reviewed a company scorecard:

Especially impressive was SteveB's scorecard slide where he ranked red/green/yellow how we fared against each of Linux/Oracle/IBM/Sony/Nintendo/Google/Apple/piracy etc etc, customer satisfaction, revenue, innovation, hiring, etc. I don't recall that ever happening before. In meetings past I always felt the execs sidestepped issues of consumer perception and confidence.

(via a link provided in Mini's post)

I'd blogged some time ago that MSFT needed a consistent scorecard for each business unit. It was painfully obvious from various analyst/financial community events that each group has been free to cherry-pick whatever metric they felt put them in the best light - no matter how silly that item was. So I'm encouraged that one apparently now exists. Of course mine included profitability and market share. It's unclear whether this one does. I had also suggested that each business unit be forced to report their scorecard at the Company meeting. There's nothing like the peer pressure of thousands of fellow employees/shareholders when you say, reveal that you lost another $1B and got your ass kicked by Nintendo - not that I'm singling out any group in particular, you understand. Still, it's encouraging that a consistent competitive scorecard now exists and that Ballmer et al resisted the normal urge to color all boxes green (assuming green is good).

As I posted recently, a big problem for MSFT in the investor community is its refusal to acknowledge the many, many, mistakes and failures that have occurred this decade. Former hedge-fund manager and TV personality Jim Cramer captures this external perception nicely with this:

"Microsoft, other than aQuantive, feels it's better at everything than anyone," Cramer said. "Maybe it was at one time. But that's a terrible amount of hubris to run a company with."

In my view, Ballmer's credibility would actually be enhanced by being more forthright and self-critical publicly. After all, it's not like the mistakes and failures aren't readily apparent to all. So the real concern is that management is blind to them and/or not focused on fixing them. To that end, will shareholders see the scorecard -or at least a sanitized version - along with a candid discussion at the upcoming meeting? Don't hold your breath.

Getting back to Mini's post, I took a look through the comments. While some didn't like Ballmer's speech:

SteveB speech was a big drag.

What eloquence! Several others - Mini included - apparently did. What really struck me though, were the number of comments where purported employees were still looking for Ballmer to solve the company's many problems. For example:

I loved the meeting, and now my after thoughts - if Steve Ballmer was able to get that speech plugged into the org, to get that vision to drive the company, most of all the division I work for, then he's the greatest CEO on earth (that I know of), if not, he's just a pretty good speaker.

Many of you bash Ballmer, but I wonder whether his insistence at staying is because he realizes the 4 frat boy cheerleaders he has reporting to him are paper pushers. I hope that's the case, I hope he's just waiting for someone more inspiring to show up and then turn things over.

The first one claims to be from a [former] AQNT employee. So in that case, I can understand how he/she might be missing some historical context. However, as I read these and other comments where folks are looking to Ballmer as the savior, I'm thinking "Who do they think has been CEO since 2000?". Isn't seven years long enough that maybe Steve's impact in that role should already be visible? If so, does anyone seriously think that the lack of accountability, vision, and execution that has characterized the company this entire decade is suddenly going to change? For instance, if the "4 frat boys" are just paper pushers - which btw seems excessive, who hired and/or promoted them? Why are they still around? Answer: er...Steve and er...Steve. Now the caveat here is I didn't hear Ballmer's speech, nor do I know the context. Was it a long-overdue mea culpa for himself and the leadership team? That would be constructive. Or merely an explanation of the importance/difficulty of the current strategies? In other words, more excuse-laden calls for "patience"? Other? Who knows. And what are the concrete plans for overcoming the obstacles? As one poster commented:

He mentioned a meeting with the financial analyst community a few weeks ago. If I heard him correctly, he said they asked him, "How will Microsoft succeed?". His answer left me scratching my head. He basically said (paraphrasing), “because we have to”, “we have great employees”, etc. Is that really an answer shareholders and investors want or need to hear?

I know what meeting he's referring to and that is a reasonable characterization of what Ballmer said. And no, it wasn't what shareholders and investors wanted to hear - hence the subsequent selloff.

I have mixed feelings penning this post. On the one hand, I'm happy that some employees left the meeting charged up. That's a good thing. I hate to pour cold water on it. On the other hand, unless Ballmer had an epiphany recently (or you subscribe to the "he wasn't really in charge until Gates left" scenario), logic suggests that MSFT under his leadership moving forward will be pretty much as it's been under his leadership so far this decade. Ballmer talks a good talk. He's been doing it for a long time. Sadly, results have proven that - for whatever reason - he can't walk the walk. So unless you're happy with the current status quo, real change is likely to require a new CEO.

Update: (another recap of the recent Company Meeting)

Update #2: Former COO Bob Herbold chimes in (courtesy Seattle PI's Todd Bishop). Excerpt (underline mine):

After giving other examples of how Porsche, Toyota and other large companies avoided business traps, audience member Janis Machala asked Herbold what trap Microsoft is stuck in. Herbold said that Microsoft is hiring plenty of people, but one of the big challenges is that it has not been able to launch profitable new units that complement its existing businesses. Microsoft also faces big hurdles as it attempts to transition to delivering software over the Internet, with Herbold calling it an "unnatural act" to ask 700 million people to upgrade their software through installations or buying new PCs. He said software "wants to come from a server."

Amazing how candid former execs can be after they are no longer face down in the SPSA feeding trough...