Could Microsoft be acquired and flipped by private equity firms?

Apple StoreThe Financial Times asks today whether Microsoft could be acquired by private equity firms, gutted for profit, and then dumped:

The new management could take the axe to Microsoft’s $6.6bn of wasteful research and development expenditure. The bloated workforce of more than 60,000 could be slashed, to the point where the huge resulting increase in cash flow would at last permit the company to borrow mega-billions.

This brings us to the real joy of private equity: the so-called “dividend re-cap”, a dividend-for-debt swap. The enhanced ability to borrow would permit the newly private company to make the greatest dividend payment of all time. At a stroke it would solve the financial problems of the army of private equity investors who have been trying – hitherto unsuccessfully – to punt their way out of pension fund deficits. Here, going begging then, is a great historic opportunity for private equity to do its job of generating excess returns from illiquidity. In truth, Microsoft would be worth more off the quoted market than on it. Thanks to the joys of leverage and dividend recaps, the excess returns would come through wondrously fast.

Ah, I hear you say, but what about the exit strategy? How, in the brutal jargon of the trade, could Microsoft be flipped? Simple. With such a humungous dividend recap, who cares about an exit strategy once the dividend is nestling comfortably in investors’ pockets?

Mitch Ratcliffe writes for ZDNet, “In other words, gut the company, take the money and run.”

“It’s a scenario that fails to recognize that the massive investment at Microsoft is in relationship,” Ratcliffe writes. “You have to believe that Microsoft’s parts are worth more than the whole, but I don’t think anyone believes Windows and Office aren’t deeply intertwined and that SQL Server and Exchange Server don’t depend on the proliferation of Windows clients. The dependencies—inefficinient though they are—is what makes Microsoft valuable.”

Ratcliffe writes, “The move would be tremendously good for open source software and Apple, as well as hardware vendors who are ready to or already have jumped to Linux. But it would devestate the whole value chain, from the Microsoft campus in Redmond to every Windows-dominated retailer in the world. And the cost to everyone other than the bankers and investors who cleaned up on the one-time dividend the FT contemplates would offset any gains to the IT market by a long shot.”

“Gradual change is already well underway. The end is nigh for Microsoft’s total domination of the IT industry. That was confirmed by Bill Gates’ pre-announced departure from day-to-day involvement in the company earlier this summer. If gutting the company is the solution now, even if the price is the gutting of the IT industry, then let the bankers begin. I think we need the time to change, not just change for change’s sake, if the result will not be Just Another Monopolist for the next generation,” Ratcliffe writes.

Full article here.

[Thanks to MacDailyNews Reader “Qka” for the heads up.]


  1. While I am not a big fan of M$ I think what has been proposed here is foolhardy at the least. The knock on effect of an M$ collapse would be huge and the rest of the industry would not be able to take up the slack quick enough. Perhaps that is why I think such a move would be blocked by the regulators as not in the public’s best interest.

    Interesting idea though. Maybe a slow stripping over a decade would be better – sort of like termites eating a house. After a while it just would not matter.

    Hmmmmm !

  2. To quote Michael Dell

    “What would I do? I’d shut it down and give the money back to the shareholders”

    How the mighty have fallen. To speak the unspeakable (even if it will never happen)

  3. I think the dependancy on MS by corporate IT folks is overstated. If/when pressed, without MS as a crutch, I’m sure they could transition over to a new platform in a reasonable period of time.

    Besides, if MS disappeared tomorrow, every installation of Windows would keep running, the endless flow of patches would just stop…giving those IT people time to transition. Then again, their job would become something more than patch installation, and I wonder if they could handle it O_O

  4. When Vista flops, Microsoft will focus on making Windows a program that you can run on top Linux or Apple OS X. It will be bundled with Microsoft Office, SQL Server, etc. And they will make a Game OS version of it.

    Mark my words

  5. There are a couple of problems here.

    First, if you “shut it down” then there isn’t much value except the cash, so the shareholders get something but not much. Look at the number of shares outstanding and the number of shareholders. Some of those folks have been waiting around for five years to see the stock do anything more than flat line.

    Second, MSFT’s current market value is astounding; somewhere around $260-billion. That’s about 5 times Apple’s value. That would be some serious leveraged buyout so don’t count on it happening.

    Finally, Ratcliffe is right. It’s the pieces together that give Microsoft value; Windows, Office, and the other applications (server, SQL, tools, etc.).

    Microsoft’s total domination is coming to an end; competitors are more nimble, react better, and are coming up with more innovation and competitive pricing (value) than the bloated corporate culture in Redmond.

    They won’t die. But they won’t own the world, either.

    That’s probably good for everyone.

  6. If it could be done to MicroSoft, couldn’t the same thing happen to Apple? I’d like to to take this financial analyst out and string his worthless ass up in the nearest tree. This kind of evil crap seems to be escalating in the business world. Take all you can – contribute nothing – and then split and enjoy your ill-gotten gains. And all the little people who lose their jobs are just shit out of luck. But I guess that’s another one of the wonderful aspects of capitalism.

  7. Unfortunately for M$ they need all that personnel to continuely plug the holes in Windows.

    As mentioned above, someone would have to come up with a quarter of a TRILLION dollars. That’s a lot of wonga.

    I do think it is time that M$ had a corporate shakeup and get rid of Bloomers for sure. Gates has given up, so they need someone to come in and reinivgorate the company. They could shed a lot of fat with a serious shake up.

    As for profit – M$ makes around 1/4 of their revenue in profit. That means huge margins on their products. Maybe give more dividends and the stock holders would be happy.

  8. The premise is very interesting. He lies a company that has $40+ billion in cash, but is doing nothing with it – it sits there doing nothing for the shareholders (lest we forget, the owners of the company).

    The owners would:
    A. Like this money put to good use to make this a growth stock again – which it is not.
    B. If A is not a reality, then get that money into our pockets thank you very much.

    MicroSoft, should they become brilliant overnight, should do what the DOA threatened to do long ago – break up MS into three companies.

    In fact, MS could be broken into three or four companies in reality.

    – Gaming/Consumer
    – OS
    – Office Productivity SW
    – Server-side DB software (Include Exchange with this group – leaving to the Office company creates more monopolistic centergies, while it being pushed into the server-side company allows this company to reach out to other companies and make some killer applications).

    The billions in cash can be split to make each of these companies move forward very effectively.

    The OS team stands the biggest group to lose. The lack of monopoly power with the Office and Exchange solutions leaves them the OS to compete on it’s own merrits… Ouch.

    Linux and Apple are obvious winners here, with the other newly formed companies eager to move to Linux and Apple with their products and find new growth opportunities there.

  9. To the extent I understand this financial legerdemain, it’s a shell game. There’s no value created, rather there’s a lot of money moving around, mostly into the pockets of investors in this scheme from the pockets of gullible investors and other bankers who are deluded into thinking they’ll make up the money through the cash flow of monopoly profits of a now deconstructed company. Indeed, what *were* they smoking?

    The real future is a lot less dramatic. Of the two largest investors, Gates net worth will gradually wind down as he bequeaths more of his holdings into his foundation, and the stock value will continue to stagnate as those assets come onto the market. Ballmer, seeing that stagnation continuing into the forseeable future, will follow the lead of another early founder – Paul Allen – and simply diversify. The iPod generation will migrate to the Mac in increasing numbers, especially at the university level, and take their newfound preferences into the job market. Apple desktops start proliferating in small businesses and prestige law firms, while Xserves become a common sight in computer rooms. Corporate customers will be increasingly resistant to Microsoft’s latest licensing scheme, putting pressure on Microsoft’s revenue stream. Governments will insist on “open document” standards, and the Office stranglehold will be broken.

    Investors, tiring of a stagnating stock price, will demand regular dividends. Microsoft’s cash pile will slowly come down as the company searches for a new growth center. Microsoft will spin off a few divisions, and settle into a more mundane existence, just one software player among many.

    You read it here first.

  10. The idea is not nearly as stupid as it seems on first reading.

    Microsoft makes money on Windows and Office. It bleeds money on everything else. Microsoft has 60,000 employees doing the work of what would require 1/10th that staff at a properly managed company. Those 50,000+ useless employees are the single biggest expense that Microsoft has. Consider this, if Microsoft had one-third the income, but one-sixth the staff it would be twice as profitable as it is now.

    A dramatically downsized Microsoft that focuses on doing two things right, rather than doing a ton of stuff badly would be a boon for:
    Microsoft shareholders, who would realize a tremendous profit from this venture, and the end to massive losses garnered by foolish R&D and a bloated workforce coughcoughxboxcoughzunecoughcrapsoftwarecough
    Microsoft customers, who with Ballmer & Gates axed in the takeover, would have a management team that can focus on quality
    Microsoft employees, whose options would finally have value and whose talents would best be used elsewhere in our economy
    Microsoft competitors, who would have a unparalleled opportunity to innovate and grow their businesses
    Consumers everywhere, who would benefit from improved security and the end of the Gates-Ballmer tyranny

  11. If it could be done to MicroSoft, couldn’t the same thing happen to Apple?

    It wouldn’t be profitable to do it to Apple. The point is that MS makes gobs of money on windows and pisses most of it away. Cut the 6.6 billion on R&D cut whatever it costs to pay for 60,000 employees, at least another 6 billion. Dismantle and sell all the loss leading departments like the xbox, windows live, origami. Leave enough staff to spit out vista. Watcht he money roll in from all the software that’s nearly complete or already released. Take all the money you’ve saved on cost cutting, all the money from selling departments, all the money MS could still make with minimal effort, the 50 billion in the bank and send it all out as dividends.

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