Friday, February 29, 2008

Breaking News: CVP Will Poole Certifies Another Laptop as Vista "Capable"

Granted, you may not get the "full" experience - though some might argue that the difference will be marginal. However, it will mean another chip sale for INTC. And isn't that all that matters?

Seriously, what an embarrassment. See the story that Todd Bishop broke here:

Additional coverage everywhere else including:

I suppose there's some way to spin this in a positive direction - and no doubt MSFT leadership will try. Here's their first lame attempt:

Throughout this process, Microsoft employees raised concerns and addressed issues with the intent to make this program better for our business partners and valuable for consumers. That's the sort of exchange we want to encourage. And in the end, we believe we succeeded in achieving both objectives.

Unfortunately, the record appears to show that while employees raised the concerns (to their credit), they were overruled by senior leadership. In other words, there was a willful decision to screw over customers and even OEM partners in order to placate INTC. Great judgement call if that's the case.

At least the Sinofsky summation shows there's hope for Windows - and the company more generally - under his leadership.

I'm not a lawyer, but these revelations would appear to be more than sufficient for the plaintiffs to win their pending class action lawsuit. So expect another $500M+ eventual judgement. Which makes the following all the more prescient:

In a February 2006 e-mail, Robin Leonard, a Microsoft employee, wrote that Wal-Mart officials were "extremely disappointed in the fact that the standards were lowered and feel like customer confusion will ensue."

She added later, "Please give this some consideration; it would be a lot less costly to do the right thing for the customer than to spend dollars on the back end trying to fix the problem."

"Do the right thing for the customer". Now there's a concept. So will anyone senior get fired for having seemingly done the wrong thing for customers, thereby damaging perceptions of Microsoft and its most important product in the process? Of course not.

Not coincidentally, MSFT is dropping Vista prices for retail skus; A move that is long overdue since the pricing there is ridiculous and sales have been abysmal.

All in all, a nice cap to a rotten week of news and stock action for MSFT.

Saturday, February 23, 2008

Awooga, Awooga... Abandon Ship!

What do you do when you find yourself aboard the USS Caine and unable to locate enough fellow deckhands willing to stage a mutiny? Why, abandon ship of course. And that's what MSFT shareholders have been doing - in droves. I wonder if Ballmer is holed up somewhere right now, in front of the Board of Directors, with a scene like this playing out? Okay, maybe not. Must be my excitement over the upcoming Academy Awards talking. Reality is probably more like Alfred E. Neuman's "What, Me Worry?" anyway.

Meanwhile, MSFT shareholders are paying the price - a $73,000,000,000 tab in just the past three months ($85B if you go back to the peak in Oct.). Of course, some of that was the mysterious inability of the stock to hold its rally coming out of the strong earnings report - something that had already gotten my spidey senses tingling and waiting for the inevitable "bad news" shoe to drop. No way anyone knew something was up in advance, right? Like say, YHOO's and MSFT's M&A advisors from Wall Street? But if you want to explain that away as just market related, compare and contrast how HPQ fared in an equally bad environment following their strong report (I'll come back to them later). Then you have the market meltdown itself, which is responsible for a good chunk of the loss. And finally you have the massive fallout from the YHOO deal. A few billion here, another few billion there, $40B+ on top of that, and pretty soon you're talking serious money.

Consider the implications, for a moment, that if I left you with just two clues: "MSFT" and "$27.68" (it actually hit $27.20 intraday), I could be talking about 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, or now 2008. That's right, the stock has hit that level at some point during each of those years. How can anyone still be a CEO with a track record like that?  Ballmer is like a small child who, having been told not to put their hand on a hot element, continues to do so anyway. Only in this case, it's our hand that repeatedly gets burned. Or - at the risk of belaboring the point and overextending the child analogy - maybe he's like the teenager who wants money for a home recording studio because he decided on a whim that he's the next Ray, or for a boxing ring in the back yard because he's convinced he's the next Rocky, or for a big-ticket plane to park in the driveway because he watched Top Gun and figures he could be the next Maverick. All of which end up going to waste, due to the subsequent half-assed dedication and limited attention span.

Funnily, this post was originally going to be about how maybe, just maybe, Microsoft was finally getting past the denial stage it has been in for most of this decade, and starting to acknowledge - and even get serious about attempting to fix - its many obvious problems. Now admittedly, you had to make like Andy Dufresne in The Shawshank Redemption and swim through a river of [MSFT executive and pr] crap to get there - truth still being anathema to current management. But there had been a series of moves recently that struck me as atypical: the YHOO bid - no matter how ill-advised (confirming that MSFT's Online efforts have failed miserably), the Danger acquisition - no matter how costly (acknowledging that Windows Mobile is being clobbered by the iPhone in the consumer space and is now at risk to even stay an also-ran in the business market, despite nearly a decade of investment), Ballmer admitting to having had "fits and starts" in the Xbox business (translation: it has been one ginourmous clusterf$k, which looks to be getting worse not better), several executive departures in areas that are all clearly struggling - dare I say some long overdue executive accountability? (I would even have entertained right-sizing the exec ranks, if it wasn't for the fact that they promptly turned around and minted even more VPs via promotions. Gotta keep that agility-sucking "top 500", er... "top 800", er... "top 1000", 1200?, in tact), and finally - gasp! - Ballmer acknowledging that AAPL is kicking MSFT's butt and that they need to do "more to market Windows" (wow, and that only took a few years of AAPL bombarding the public with Windows-bashing ads and increasing their marketshare at MSFT's expense).

FWIW, I attributed all of this to either fear (i.e. MSFT has seen the future and doesn't like the view) or MSFT management finally getting sick of being a punch line for most of this decade - the edge going to the former (not that it much matters if the end result was achieved). But somewhere along the way I started to doubt my entire premise. Maybe I just saw what I wanted to? Which is why you're getting this post instead. After all, what right-thinking management team with problems like those below, would turn around and make a huge offer to buy someone even more screwed up?:


Home Server









And that - believe it or not - is just a quick sampling. Wouldn't it be an idea to maybe get your own clearly dysfunctional and threatened house in order first, before embarking on trying to clean up someone else's? Is there any doubt that management's credibility would be higher, and the market would be responding more favorably to the proposed deal currently, if that had been true?

Ballmer, imo, has one opportunity to get things back on track. Given the hostility of the YHOO Board to the offer, the list of good people jumping ship or being pushed, the severance programs being put in place that would add billions more to the cost of this already insanely valued deal, its declining share in search, recession risk in this space broadly, and the clear message being sent by MSFT shareholders, Ballmer should revoke the proposal. Just sail away. Chalk it up as a somewhat successful ramming of an enemy cruiser (even if you had to disable, at least temporarily, a few of your aircraft carriers to do it), and leave them to sink via additional shareholders lawsuits and customer/employee defections. Maybe buy just the parts you really wanted at some future date - for ten cents on the dollar versus a 60% premium -  when they're on the block and being sold as scrap. And yes, give up your dreams of blowing up the GOOG battleship anytime soon. Like the Bismark, you let that one get built and sail out of port right under your nose. But instead of chasing it recklessly now, maybe see if you can manage to successfully maneuver your own little destroyer-minesweeper for a change, without taking on water continuously and using shareholder cash to fuel the bilge pumps. Perhaps - and I'm just spit-balling here, like Jack Nicholson in A Few Good Men - use some of those $10B's in R&D every year to actually innovate and say, eventually make battleships obsolete? Oh, and do a mea culpa to all shareholders and set about making the current MSFT the best fighting vessel it can be. 'Cause it sure ain't there currently.

Meanwhile, accepting the Oscar for best CEO is... envelope please - HPQ's Mark Hurd:


It's just that the CEO who may be the best big-company operator in the country is all about making uncomfortable observations that so far have ended up being the right call for his company: Market share isn't the best goal to shoot for; even good businesses need to be examined carefully (especially their cost structures); and strategy and execution trump vision any day of the week.

(Take special note of the "cost structures" and "strategy and execution" parts)


Hurd doesn't talk about the competition.

How refreshing.

He boils down the CEO's responsibilities to three tasks: setting strategy (not offering a vision); aligning operations and modeling ways to execute on the strategy; get the best team to help the CEO. "There are a thousand distractions that keep you from doing that," he says. But that's where the focus needs to be.

Pretty clearly, Ballmer has too many "distractions" as it is. The last thing he needs is another super-sized one. That said, will he be smart enough to recognize that and disengage? Sadly, I doubt it. Egos are now involved. So the silver lining is that this decision is big enough and reckless enough that if/when it goes forward, he'll either rule the ocean if it succeeds or be scuttled when it fails. And since we've seen this movie before, odds heavily favor the latter. Let's hope there's enough of the ship left by then to resurrect. Maybe Captain Hurd will be looking for a new berth by then...

Sunday, February 10, 2008

Reprieve, Or Just Haggling On Final Price?

Word over the weekend (from various sources) is that YHOO's Board is set to reject MSFT's bid on Monday:

If true, you have to wonder what YHOO leadership's real intention is here. Could they possibly be even less concerned about their shareholder's welfare than say, our management, and stupid enough to flat out reject an offer this lucrative? I guess it's possible, but they'd better have one hell of a consolation prize waiting behind door #2 for their owners. If it's just a zonk, a massive shareholder lawsuit will soon follow, and the current management and BOD would be well advised to start updating their resumes. If a prize is in the offing, how will it be financed? Outsourcing search ads to GOOG, as has been rumored, doesn't seem sufficient to generate the short-term funds required to pay holders a significant one-time dividend or equivalent. In fact, any hook up with GOOG is going to face a tough time passing regulatory muster.  So will YHOO take on debt to do something like that? Sell a partial ownership stake to someone else? Other? Unclear, but interesting.

Of course, this could be - and mostly likely is - just a negotiation ploy. YHOO's Board may well be resigned to being MSFT's Valentine in the final analysis, but figure they might as well hold out for chocolates and roses in addition to that $44.6B dinner originally offered (now subsequently devalued as the price of MSFT shares has dropped). If that's the case, common sense would suggest dialing down the "they're trying to steal us" rhetoric  - especially in light of a 60% premium to market bid that several pundits have described as "insane", and which MSFT holders liked so much they promptly chopped $40B+ off the company's marketcap.

And what's Ballmer's next move upon a formal rejection? Now that he has opened this veritable Pandora's box, in the process destroying that aforementioned MSFT shareholder value, is he going to simply shut the lid and walk away? Sorry folks, early April Fools' joke? While that's likely best for MSFT holders, certainly short-term, it's not likely to enhance his credibility - and he isn't exactly swimming in an abundance to begin with. Will he choose to turn it upside down and shake it instead, bypassing YHOO management altogether and going directly to shareholders - a true hostile takeover that drags on for months? That'll help the stock price. Not! Or will he try to appease the evil spirits, order up those chocolates and roses (and, at the rumored $40 price, dessert wine, a fur stole, a diamond ring, etc.), and just add it to our tab? Capital Research no doubt had something to say about that one - thank God. But I suspect that Ballmer will still bring the offer back up to the at least the original $31 valuation, and will probably go another 10-15% above that.

As a sanity check - or more accurately insanity check - if he ends up going all the way to $40, the deal would now be worth ~$53.6B. Not counting the additional billions here or there in advisor fees and other miscellaneous transaction costs, that would result in the originally envisioned (and abusively dilutive) "600M" of newly minted MSFT shares swelling to ~938M+ - or almost a 10% overall dilution. And we didn't even get the chocolates, roses and dinner first...

I have a better idea. Let's get someone to see the value in MSFT that Ballmer has kept so well hidden these past 8 years, and offer us a 60% premium. Given Friday's close, that would put us at $45.69 - or just about 20% down from where we were when Ballmer first took over as CEO in '00. Surely someone would like us to be their Valentine? We aren't cheap, but we have redeeming virtues. And we won't be ungrateful and accuse you of trying to "steal" us.



It's official, YHOO has rejected the offer as too low:

(though they did dial down the rhetoric from that used in the weekend's convenient advance leak).

Some numbers and background on what YHOO is really worth courtesy of Henry Blodget:

(The range btw is $21-$26, and that's using optimistic numbers and assumptions. It's also on a standalone basis. As part of MSFT, YHOO's results would enjoy MSFT's multiple. For example, "35X 2009 estimated EPS = $26", would become "16* 2009 estimated EPS = $11.88" using MSFT's current multiple - give or take any "synergies", of course. Recall what I said in an earlier post about an eventual $1-$2/share goodwill write down for MSFT if this deal goes through? Now you see how that could result)

Not surprisingly, MSFT is selling off further on the news. Consensus expectation appears to be that MSFT will make a higher counter offer - at least before trying other more aggressive measures. In other words, dig in - it's going to be a while, and  the stock is going lower before it's done.


Update #2:

MSFT officially responds:

("Good" news? Not upping the original offer, despite the subsequent devaluation - to around $29 and change for each share of YHOO. Bad news? Still want the deal. Read: will likely do so eventually)

Also worth a read:


Concludes Havens: “It’s not a question of whether they will be acquired, but at what price, and how long will it take.”

Thursday, February 07, 2008

Media Roundup

1) Mark Cuban wades in:

(I respect Cuban, but he must not own MSFT shares)

2) Review of various integration scenarios:

(#1 role model: HP/Compaq. Um, didn't that one initially screw up so badly that the stock nosedived and the original CEO got the boot? On second thought...)

3) Others, besides YHOO's owners, who stand to make a killing:

(MSFT shareholders get to supply the blood)

4) An absolutely scathing review of MSFT:

Excerpt (bolding mine):

Ask investors what they think of Microsoft's innovative juices. The company's stock market value is huge – $280-billion (U.S.) – but it goes for 15 times earnings. Compare that to a far less profitable information company like Thomson Corp., which has no true monopolies (and is a part-owner of this newspaper). At a 10th the market cap, Thomson changes hands for 21 times forward earnings.

Why? We would argue that it's at least in part because Thomson is much more careful with shareholders' money. Thomson investors are rarely diluted by acquisitions or by squandered investments. It's hard to argue with millions of investors.

(Hmm..less "careful with shareholder money"? √ Constantly diluting us by "acquisitions or by squandered investments"? √√ Arguing with millions of investors? √√√).

5) The most succinct but insightful comment I've seen yet on this market space. Ballmer would be well advised to pay attention to the same input:

Excerpt (bolding mine):

Yahoo lost sight of who they are and who their customers are. Yahoo's perception is that their only competitor is Google. But 95 percent of their revenue comes from advertising -- so their competitors are really the broadcast TV networks. They think they're in the search game,when they should really be in the brand advertising game.

(Oh, and hire this person)

6) Analyst Trip Chowdry provides some comic relief with a fantasy conspiracy theory worthy of Oliver Stone:

(If only Ballmer were that strategic and cunning. He's neither.)

7) The sad reality:

(Near 100% chance MSFT shareholders lose money either way though)

8) Finally, the no-brainer trade now that MSFT management have effectively told us they've revisited the future and that what appeared to be incredibly bright initially, turned out to be just the approaching headlights of a Mack truck traveling full tilt with glamour tags reading:

(Cue sound of air horn)

Meanwhile, another selloff for MSFT on 2X average daily volume:



Worth a read...


I know you want to make your mark on Microsoft, but you should stop trying to be all things to all people. Take a tip on focus from that other Steve.

Dear Steve,


Let's talk over this Yahoo! (YHOO) thing before you move ahead. It's a profoundly bad idea.


(Some possibly good news here. Especially since Capital Research is the largest institutional shareholder of both companies, and therefore has much more potentially at risk on the MSFT side)

Update #2:

More... um, "praise" for the deal:


He is especially frustrated by Gates's pursuit of his white whale when Microsoft has bigger fish to fry, like parrying the challenge from free operating systems like Linux; adapting to the migration of computing from the desktop to the cloud, and competing with Apple as it insinuates its hardware and software into people's living rooms, cars and telephones....


"Just now, when they've got momentum, they're going to crush it with this terrible deal," Mowrey said. "I think Microsoft is worth a lot less today than I thought it was worth yesterday."


"This is totally insane," says Shareholder Value Management analyst Jeff Embersits. "There's no way Yahoo's worth $44 billion. Period. [Yahoo Management] should fall on their knees, kiss the ground and go home and buy Porsches."

("Insane" seems to be popping up a lot when describing this deal.)

Wednesday, February 06, 2008

Having Fun Yet?

I know I'm not. And if you think the market is getting it wrong, consider that MSFT was previously expected to make $2.09 per share in FY09. At a semi-reasonable 18X multiple, that would have generated a target price for the stock of around $37.62. Now, consider that some - notably Bernstein - think the YHOO deal could be .32 dilutive to that FY09 EPS target alone. In other words, it could drop to $1.77. If the multiple stayed the same, that would take the target down to $31.86. Which, not coincidentally, is virtually identical to what Canaccord provided today as they downgraded MSFT:

Canaccord Adams downgraded MSFT as they believe shares will come under pressure if the company raises its bid for YHOO. Note that the firm upgraded YHOO to Buy from Hold. Target to $32.00 from $40.00.

But wait, it gets worse. See, with all the extra risk and uncertainty, there's no particular reason to think the market will still award an 18X multiple. I'll leave you to do the math if it dropped to say 16X, or - God forbid - 12X. Additionally, no one knows exactly how dilutive this deal will be. That's because it's half cash, half stock. Now in theory, as MSFT shares continue to decline, so too does the value of the offer. There's just one problem: even if YHOO management decide to accept the deal (and their options are pretty limited), they're very likely to insist that MSFT get it back up to at least the original $31/share level (some are saying $36-$40 might even be required).

Since Ballmer appears to be intent on doing this deal (irrespective of the strong feedback shareholders whom he is meant to represent and work for are giving him), that would leave two choices: adjust the share multiplier higher (from its current .9509 of a MSFT share) - thereby resulting in even more shares being minted, further dilution for us, more downward pressure on future EPS, and a larger ongoing dividend obligation for the company - or change the 50:50 cash/stock balance to favor more cash which, since MSFT doesn't have it, would require taking on even more debt. And the more MSFT shareholders bail, the lower the stock goes, and the worse this non-virtuous failure loop becomes. Neat, huh?

Then there's the fact that while Dumb and Dumber say this deal will be breakeven or better within two full fiscal years after the deal closes, they also said that was excluding various charges. In other words, don't count on EPS after charges - or final EPS - to be breakeven, even through FY10. Related, there is no way that YHOO on paper is going to be worth this price. So at some future point, MSFT is going to have to take a huge charge to write down the "goodwill" difference between what they paid, versus what YHOO was actually worth. I guesstimate that that charge will be at least $1/share, and it could easily be $2 or more depending on what the final price is, how the integration goes, etc.. Needless to say, a $1-2 charge in some future fiscal will have the effect of wiping out a large part of MSFT's overall earnings for that entire year.

As I said in the last post, if you're a MSFT shareholder you should be hoping this deal gets kiboshed by either YHOO or regulators (however unlikely). Alternatively, you should hope that MSFT and YHOO come to some other accommodation. The best option there would be a standalone entity (either under the YHOO listing or a new one), into which both YHOO and MSFT contribute and MSFT shareholders get stock.



Our case-in-point arrived today when Canaccord Adams cut Microsoft from "buy" to "hold." Prior to today's activity, MSFT sported 14 "buy" or better ratings, compared to just 4 "holds." If this line of thinking begins to take hold on Wall Street, the shares could be looking at additional declines over the next few months. Additional fuel for the fire could come from the options pits, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.44 ranks below 72% of all those taken during the past year. While we can sit and debate the desperation and necessity of Microsoft's bid for weeks, it is investor sentiment that will ultimately vindicate or scuttle the company's shares. And right now, investors appear to be leaning heavily toward the "scuttle" end of the spectrum.

Tuesday, February 05, 2008

"This is like a person who's completely lost his mind"

That's Joe Rosenberg's take on MSFT's bid for YHOO (Rosenberg is Chief Equity Strategist for Lowe's Corp., a major Wall Street heavy hitter, and MSFT shareholder). Close, Joe. It's not like that, it is that. Rosenberg continues:

It's absurd. They're not going to earn anything like a reasonable rate of return on their investment in Yahoo. It just doesn't make sense.

This deal would do more harm to Microsoft shareholders than any of its competitors can do to it," Rosenberg said. "The company has lost sight of its principal focus, which is to produce value for shareholders."

Hmm...I believe I may have mentioned that last part a gazillion times or so over the past few years.

Meanwhile, Ballmer and Liddell are busy talking up the synergies of this deal. "Synergies", btw, are what you point to when you can't provide any specific, reasonable, measurable basis under which this deal makes financial sense, especially for MSFT shareholders (otoh, YHOO ones make out like bandits).

As someone who has repeatedly called for MSFT to reduce its at times chronic overcapitalization and use that money to make smart, accretive acquisitions or return it to shareholders, I'm obviously not against them doing either per se. But if you're going to go the acquisition route, note the qualifiers: smart and accretive. Buying YHOO, imo, is neither. The company already agrees that it isn't the latter - at least not for two full fiscal years following a successful purchase, and even then "excludes a lot of the accounting and purchase accounting of one-off costs".

Ballmer is touting this deal as building on the successful momentum that Online has been able to generate. Huh? This deal is about failure, not momentum. Failure to spot the potential of this market space back in the late 90's. Failure to respond for YEARS while others staked out their now dominant positions. And failure over the past 4 years, since the company got "serious" about it, and spent $10B's directly (and likely at least that much again in R&D) in a failed attempt to catch up - or even generate a profit. Meanwhile, we have the failure of his previous massively expensive "emerging" bets to be anywhere near as attractive, or even to collectively payoff.

Then there's the issue of credibility. Why should we believe anything coming from the team responsible for that track record of successive failure, who initially said catching up would be a matter of 6-12 months (how'd that work out?), or who recently justified $6B more of our money going to buy AQNT by assuring us that most of the big pieces were now in place for success?

On the timing front, why now when MSFT was finally showing some organic business strength and attracting investors? In a heartbeat, perception of MSFT has gone from potential comeback kid to looking even more desperate and ineffective than ever versus GOOG. And on a more macro basis, why do this with the economy sliding into recession, with many forecasting an extended bear market, when GOOG is experiencing their first major revenue and earnings miss (finally beginning a process of unwinding their -  and most related company's - higher multiples), and consumer-facing entities in particular are likely to be hard hit? Was YHOO secretly getting stronger and more valuable despite their recent grim earnings call, layoff announcements, and nosediving stock price?

And what about valuation, a whopping 60% premium to market bid - some 66X earnings - for a company already trading at 2X the PE of MSFT and expected to actually shrink earnings next year despite operating in one of the industry's fastest growing segments? And given GOOG's miss the night before, YHOO was poised to drop significantly further on Friday. So then the real premium would have been more like 70%.

Then there's the impact on MSFT shareholders. You know, the folks who actually own this company? With $40's looking possible (assuming a better market) on the back of some long-awaited business improvement and stock momentum, why should we want to see that destroyed via an acquisition that negatively impacts EPS for at least FY 09, and probably FY 10 as well? Not to mention adds tremendous additional risk, uncertainty, etc. in the interim? Similarly, why would we want to see the past $20B+ of buybacks using our cash instantly reversed, thereby diluting our ownership interest all over again? If this really is worth betting the farm - which is what Ballmer has effectively done - why not make it an all cash offer like every other recent one? The company now says it plans to take on debt for the first time anyway to finance this deal, so that historical excuse no longer flies. And Ballmer's answer yesterday - that he wanted to avoid financial risk (in addition to market and technology risk) - is hogwash.  MSFT could easily make this an all cash offer, take on debt to fund the part not covered by cash, and then suspend the existing buybacks for the next couple of years to pay down the debt (or do just enough to neutralize normal ongoing dilution). There'd even be a beneficial tax writeoff. And YHOO has several equity interests that could be spun off in the interim to recoup at least another $10B (though you have to approach that carefully since the Chinese Alibaba stake in particular could be long term attractive). But instead, Ballmer et al plan to do what they always do: let Mikey - aka the average MSFT shareholder - eat it. Well, actually another orifice is involved...

And what about the business logic? Do two GOOG roadkill equal one GOOG killer? If not, is distant #2 sufficient to justify this investment over any reasonable timeframe? Or is it reliant on some asinine 1-2 decade payback period like say Xbox, or maybe 2-3 like IPTV? Are current MSFT/YHOO customers going to say, "Wow, this disruption and uncertainly has me really excited. I'm not going to jump ship to GOOG and simply watch and wait. Instead, I'm going to stick with you though the next couple of years of integration nightmares, false starts and confusion"? Are current GOOG customers going to say "I bet MSFT can integrate both entities and still do a better job for me than GOOG does currently. Sign me up"? Are YHOO's predominantly Silicon Valley/BSD/Open Source/Open System orientated leadership and engineers going to sit back and say "Thank God MSFT came to our rescue. I've always admired them so much, and can hardly wait to start taking orders from Redmond and being told to switch to their proprietary technology, versus simply walking down the block to XYZ tech leader or startup"? And who's going to do the major personnel cuts required to give this merger any chance of success? Ballmer, under whose leadership MSFT has turned into a top heavy, slow-moving, bloated bureaucracy? Is he suddenly going to reinvent himself as Al "Chainsaw" Dunlap and lop off 5000 plus employees minimum? What about the obvious duplication across almost every area? How do you consolidate effectively when you're primarily after the user base? Some pundits are saying "they'll just pick technology winners" in each category. Excellent. So if I'm the guy who was using YHOO mail, and MSFT selects Live Hotmail (or whatever it's being called this particular week) instead, they figure I'll just happily accept it? Are they frigtarded? In almost all the major areas, users either consciously or unconsciously made a choice. If you attempt to remove that choice, there will be pushback and defections. The most likely beneficiary of that is GOOG.

I also find myself getting reflective, and noting that with this move Ballmer will have blown through the entire cash pile that once reached ~$70B - and even taken on debt for the first time in MSFT history - while some competitors have invested far less (directly and via ongoing R&D) and yet now enjoy cash balances not far off MSFT's. What has been accomplished for all that cash and ongoing R&D investment? Is MSFT stronger? Are shareholders better off? Are customers happier? Are employees more motivated? Are the core products better thought of? What about the impact of this move on MSFT's existing businesses? You know, the ones they've done such a great job running to date that the banner "We uninstall Vista" is a differentiator for some PC shops, OS X continues to gain share, SQL Server just got delayed again, IE continues to lose dominance to Firefox, Nintendo continues to dominate and PS3 is threatening to finally outsell Xbox this past month (for the first time), the flash Zunes just got a quiet price drop (no doubt due to very poor sales), IPTV is still a non-factor to MSFT's overall results despite more than a decade and $10B's invested, etc. etc. etc. Are those areas going to get more or even less focus as MSFT goes further afield from its supposed core competence, vainly battling GOOG head-to-head? And what if the cash cows need to buy someone? With no cash left, does that mean MSFT goes further into debt? Or do they go without, while Online loses some more money for us?

I've discussed the concerns. Could this biggest of reckless big bets pay off? Sure, there's an outside chance it could succeed given a long enough timeframe (read decades), uncharacteristically brilliant MSFT execution, and GOOG somehow fumbling. Is that reason enough to do it? No. Were it $20-$30B, my answer might be different. Everything has value assuming the right price. More importantly, I'm getting really tired of "promising" emerging opportunities being turned into financial sinkholes by leadership's "strategies", and then being forced to underwrite desperate fourth quarter Hail Mary passes with either our cash or via dilution of our ownership (while comically hearing that there's still plenty of time left on the clock), all for the promise of a future touchdown which never materializes. MSFT shareholders are constantly being asked to underwrite massive investments for some future payoff, only to be told (when that future arrives) that the payoff is delayed and still more investments are required.

Here's how Ballmer sums up this deal:

We have been losing money. Our plan here would be to not lose money in the future

Shareholders who have held MSFT stock since he took over as CEO in 2000, are faced with the same dilemma. Maybe that's why so many are selling on this news. The rest should be hoping that this deal gets kiboshed - either by YHOO or via regulators.




A quick way to destroy my valuation target, not to mention the perception that you are a good company, is to go and throw your cash at a crappy acquisition target, paying 40x FCF in the process – and this is coming from someone who stuck up for Microsoft’s aQuantive and Facebook deals. Maybe this is all part of a brilliant plan on Microsoft’s part, but all I see is a massive expenditure of capital into a non-core industry where the company has no track record of success.