Why Is Microsoft Raising Money?

Sometimes the financial media buries the lead.

Several sources have been reporting about Microsoft's (Nasdaq: MSFT  ) filing with the SEC over the weekend, disclosing the sale of its 7.3% stake in Comcast (Nasdaq: CMCSA  ) . Based on current prices, the software giant could have pocketed between $2 billion and $3.4 billion before taxes depending on when the transaction took place.

Reporters are waxing nostalgic. They are looking back at when Microsoft originally invested $1 billion in Comcast in 1997, around the time when Bill Gates wanted some skin in cable television with visions of WebTV as a couch potato's cybersurfing device.

To heck with sentimentality, I say. The real question here is what is driving the company to add to its already brimming coffers with the asset sale.

There's a fork in the road, so let's spoon
There are three obvious explanations for the company's divestiture:

  • The stake in Comcast simply doesn't jibe with its long-term plans.
  • Microsoft is raising cash to help offset its aggressive share buyback efforts.
  • Now that Yahoo! (Nasdaq: YHOO  ) has a new CEO, Mr. Softy is ready for another go at mattering in paid search before it's too late.

Let's shoot them all down.

The problem with the first scenario is that Microsoft's timing would be lousy. Shares of Comcast are trading near seven-year lows, fetching half of what they were worth when they peaked two summers ago. Sure, most equity investments have cratered in that time -- and things can always get worse -- but "sell low" doesn't seem like much of a battle plan.

The second scenario makes more sense. Microsoft announced a $40 billion share repurchase initiative four months ago. However, it doesn't have enough in the bank to cover the full amount if it's serious about going through with the buyback. Like most companies playing PacMan with their outstanding shares, Microsoft can take as long as it wants in honoring its declaration, deploying its healthy cash flow into gradual repurchases.

For the sake of current shareholders, let's hope that this isn't the case, with Microsoft arming itself with greenery just days before tomorrow's quarterly report. It could be a sign that the software company is eyeing a weak quarter, and it's readying itself to do some serious repurchasing at lower prices to help support its stock price.

The third scenario is feasible, but Microsoft is interested in acquiring only Yahoo!'s search business. Yahoo! CEO Carol Bartz is unlikely to let go of her new company's golden goose this quickly into her tenure, though it stands to reason that she would consider a healthy premium for all of Yahoo!.

Are you leaning in any of the three directions here? I'm not. "None of the above," would be my response.

It cuts like a knife, so see you ladle
With interest yielding a pittance, it doesn't make a whole lot of sense for the company to be stockpiling cash unless it feels that Comcast stock is going down. Maybe it took my Throw This Stock Away column trashing Comcast last week to heart -- but seriously -- if the ground caves beneath Comcast's feet, Microsoft is likely to be in for a tumble as well.

The most logical explanation is that Microsoft is building up its war chest, taking advantage of the market weakness to acquire the puzzle pieces it needs to diversify from its meandering software sales.

So, who will it target? If it's not Yahoo!, here are a few intriguing possible buys:

  • Research In Motion (Nasdaq: RIMM  ) -- Even the pros have been buzzing about Microsoft making a play on the BlackBerry maker. "I'm fairly certain they have a standing offer to buy them at $50 (a share)," Canaccord Adams analyst Peter Misek told Reuters three months ago. If true, Microsoft blew a golden opportunity when RIM bottomed out at $35.09 last month. It's now back above the $50 mark, but if Microsoft feels that this will be its last chance to make a bold smartphone play, it may make the leap. If it doesn't want to pay too much for Research In Motion, it can always make a smaller bet by gobbling up Palm (Nasdaq: PALM  ) , at a time when the smartphone pioneer is starting to bounce back after new product and software rollouts.
  • Netflix (Nasdaq: NFLX  ) -- There is good blood between the two companies. Netflix CEO Reed Hastings sits on Microsoft's board of directors. Netflix threw Microsoft a bone last year when it made the Xbox 360 the only video game console able to play its video streaming service. With entertainment being one of Microsoft's fastest-growing divisions, Microsoft wouldn't mind reaching out to nearly 9 million Netflix subscribers on a regular basis. It can package software demos with DVD rentals. It can restrict any potential Netflix move into video game rentals to Xbox titles exclusively. It makes sense, though Netflix is one of the few consumer-facing companies to see its stock rise in 2008, so a buy won't come cheap.
  • Adobe (Nasdaq: ADBE  ) -- If Microsoft can't breathe new life into its software business organically, it can certainly do worse than snapping up publishing software specialist Adobe. The move would reach out to high-end graphic designers and webmasters while giving it ownership to consumer staples like PDF file tools and the online video Flash standard.  

Then again, maybe it's nothing at all. Microsoft always loves to stock its balance sheet with greenery, even if it has been deploying it in different ways in recent years.

What do you think Microsoft should do with its money? Let me know in the comment box below.

More meat to the Microsoft bone:

Microsoft is a Motley Fool Inside Value pick. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is a fan of Yahoo! and Microsoft but not of bad weddings. He does not own shares in any of the stocks in this story, save for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2009, at 3:06 PM, xrm98 wrote:

    how about HTC the Taiwanese PDA phone manufacturer? It would make more sense for them to acquire a company with a proven track record of delivering good quality Windows Mobile-based PDAs.

  • Report this Comment On January 21, 2009, at 3:13 PM, pthomsen40906 wrote:

    OK, I am a new member of Motley Fool, but I am sick and tired of the Advertorials trying to entice readers to their subscription. I am not saying it doesnt work, I bought in, but long term this is annoying and boring and unproductive reading.

    So here is 5* to a worthy independent article that takes Motley Fool closer to Seeeking Alpha and makes them far more credible. Keep it up!

  • Report this Comment On January 21, 2009, at 3:17 PM, ir4getful wrote:

    Make an offer for Yahoo, either in whole or part. Google needs some serious competition and, more importantly, I own some Yahoo and I want out.

  • Report this Comment On January 21, 2009, at 4:30 PM, stratton2 wrote:

    Two items:

    1. Microsoft originally invested as part of a campaign to get Comcast to use their set top box software. Comcast isn't using it. So Microsoft may have sold the Comcast stock off because they finally got the "message" loud and clear.

    2. Microsoft has filed with the SEC back in November about selling up to $2 to $4 billion in bonds.

  • Report this Comment On January 21, 2009, at 6:04 PM, MichalTod wrote:

    All three suggested purchases would be odd for MS to do. RIM makes a certain amount of sense, but it would mean that MS would be declaring Windows mobile a failure... which I doubt it would do. Netflix is primarily a bunch of warehouses stocking DVDs; MS has publicly said the future for movies does not involved bits of plastic, and MS does not need Netflix to help with streaming. Adobe would be an interesting purchase, but I would be stunned if Adobe management would accept a MS purchase; Adobe is not in decline like Yahoo is, and management is fiercely independent.

    My guess is that they just wanted the money lying around for their stock buy back. MS has done lots of bad investments in the past, so selling "low" doesn't mean anything to them when Windows and Office generate more cash then they can waste in the other parts of their business.

  • Report this Comment On January 22, 2009, at 12:51 AM, greenwave3 wrote:

    Buy Apple. They'll never beat them, so might as well pay the man.

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