The 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.]