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.]
contd.
3) Zune contd.
Of course, this assumes that MSFT is developing Zune in some Einsteinian paradox where time stands still outside of the MSFT bubble and nothing moves forward.
But if Apple are developing a ‘serious’ phone with 32GB of high-density NAND (as per the article earlier this week) and simultaneously progressing ‘iPod’ development, Zune’s ability to build a customer base will be crippled before it gets out of the gate.
And more customers for Apple’s consumer electronics products means more potential converts to the Apple platform which brings us back to Vista’s popularity.
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In the Business Week article mentioned above, the writer mentions that MSFT’s shares have appreciated by 20% since June. That’s really just a relative picked out at random, because MSFT’s market cap (the real figure that matters to this whole fantasy) has declined by 12.3% since last November and that figure is effectively static since March 05.
Let’s say that 1, 2 and 3 all screw MSFT for another three or four years: MSFT could be worth as little as $150-180 billion, but could – with greater efficiency and better, more focussed management – have a potential value of $330-360 billion. From a slash and burn point of view, you could take an axe to a huge amount of flab in the empire and sell off a variety of non-core interests that detract from management focus.
So long as you can do the flip in three or four years, you’d have a project yielding a potential 30% per annum compound return which sounds like a deal to me.
spelling ftw
Fanatic Realist: Great Analysis!
We know Ballmer can be acquired but flipped would require rewriting the laws of physics.
These articles show a huge lack of confidence in current M$ management. Which seems more and more devered with every major move.
Good one, Ampar!
LOL!!!
BTW, Fanatic Realist is on target. If M$ is more valuable chopped up, it is in the country’s interest to put those that capital (and those workers) to better use. “Creative destruction” is not just destructive, it also creates something better or more efficient–that’s the whole point.
Thanks, Jake!
I read somewhere online that if you drop a small object like a pencil or paper clip in front of Ballmer that it will freeze in midair and then slowly orbit around him. The IAU has been notified to consider him for planetary designation.