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In a filing with the Securities and Exchange Commission, Microsoft revealed that it intends to issue debt to raise some additional capital. It's not clear just how much money the software giant plans to borrow, since company management left the dollar amounts blank in the SEC filing. Published reports indicate Microsoft aims to borrow about $6 billion in the three-part bond offering, although details remain sketchy.
It's also not entirely clear why Microsoft is issuing the bonds. Microsoft does have a sterling credit rating, so it will pay next to nothing in interest on the loans. The supplemental filing indicated the proceeds of the debt offerings may be used to fund "working capital, capital expenditures, repurchases of our capital stock and acquisitions." In other words, outside of carpeting Guam, Microsoft could do almost anything with the cash.
And therein lies the rub. Despite turning a $3 billion profit in the first quarter of the year, and despite sitting on $25 billion in short-term investments, cash, and cash-equivalents (danger Will Robinson), it doesn't look like Microsoft's management has an idea of what to do with all of that loot. Published reports indicated that the bond issuance--Microsoft's first-ever--would help finance the company's proposed five-year, $40 billion stock repurchase plan.
Then again, buying back shares and boosting dividends seems to be about the only thing Microsoft has been doing over the past four or five years. Admittedly, the company has made smaller acquisitions. Unless the company suddenly plunks down for SAP, however, no big score is in sight. True, Microsoft has had a few commercial successes--mostly in its video game operation. But the Windows folks havn't exactly lit up the toteboard with their business offerings, which make up about a third of the company's revenues. Certainly, Vista (nee Longhorn) has pretty much been a bum steer. Meanwhile, rivals like Google have passed Microsoft by with innovative and attractively-priced (FREE!) products.
So, Microsoft takes its cash and buys back more stock. That may be good short-term news for shareholders, but it feels to me like Microsoft is simply punting again. Stock repurchases are often a lame use of cash, designed to artificially boost earnings per share. Generating real value to shareholders involves investing in new products and acquiring complementary businesses. Of late, Microsoft's track record hasn't been so hot in either of those areas.
Here's another tack Microsoft management might want to consider: amid great fanfare, announce an expansion of the share buyback program. The twist? Don't actually buy back any shares. The announcement itself would likely goose the company's stock price, yet Microsoft's massive cash reserve would go untouched. More important, such a stratagem would display the kind of out-of-the-box thinking that has been sorely lacking at Microsoft of late. It would also give the company's top managers a number of years--probably five to ten, absent parole--to ponder their next big strategic move.
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