3 Stock Ideas for the New Microsoft

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Once known as the world's richest company, Microsoft (Nasdaq: MSFT  ) has resorted to the unthinkable: agreeing to sell $3.75 billion in corporate bonds. That's right; this one-time cash champion -- so flush that it paid investors a one-time $3 per-share dividend in 2004 -- is taking on debt.

Interestingly, Mr. Softy isn't alone. Cisco (Nasdaq: CSCO  ) recently increased its leverage, joining stalwarts Oracle (Nasdaq: ORCL  ) and IBM -- other tech-heavies that have dipped their wallets in the debt-market pool.

Their timing is interesting. Most firms have used equity to raise capital after the credit markets froze during the global financial crisis. Yet now there are signs that the market is thawing. The TED spread is narrowing, and like stocks, high-yield bonds are recovering from an awful performance in 2008. Microsoft's entry into the debt market could further smooth volatility by boosting confidence.

Meet the new Oracle?
For its part, AAA-rated Microsoft is likely to raise all $3.75 billion at very attractive rates, which could be a boon for investors if executives find ways to deploy that bounty at high rates of return.

In other words, Microsoft needs to position itself to be more like Oracle.

Few in the industry can match CEO Larry Ellison's record of using leverage to his advantage. Rather than spend precious equity, the database king typically resorts to its flush balance sheet and rich cash flows to buy rivals. That's been the case with deals for PeopleSoft, BEA, and Siebel in the past, and it will be again when Oracle commits $7.4 billion to purchase Sun Microsystems.

History calls this a smart strategy: Oracle's returns on capital have remained steady -- between 16.7% and 17.8% -- as growth has soared since its acquisition spree began in 2004.

Here's your shopping list, Mr. Softy
Where would Microsoft CEO Steve Ballmer use his new corporate charge card to go shopping? The obvious choices would be business software partner SAP, which would benefit from having tighter ties to Microsoft's SQL Server database, and Yahoo! (Nasdaq: YHOO  ) , whose search business has already been a target of Ballmer's teasing.

Either deal would make sense for Microsoft's corporate customers -- partnership talks with SAP stretch back years -- but I wonder if Mr. Softy's fresh dollop of capital wouldn't be better spent building its consumer-facing business. Here are three of my best ideas:

Netflix (Nasdaq: NFLX  ) . An obvious choice, insofar as CEO Reed Hastings sits on Microsoft's board and the two companies have cooperated to deliver movies through the Xbox 360. Plus, as a retail partner, Netflix would be ideal -- drop off your videos at the Microsoft entertainment center in exchange for your favorite Xbox games.

Twitter and Facebook. Any serious run at Google (Nasdaq: GOOG  ) would necessarily include social search in some form. Microsoft already has $240 million committed to Facebook, whose 200 million users gush data daily, and Twitter is apparently talking with everyone except for Google. That's a huge opportunity.

VMware (NYSE: VMW  ) . Remember the old Microsoft mantra: "Embrace and extend?" When it comes to cloud computing, data centers are what you embrace, and virtualization -- the practice of transforming one server into the equivalent of many, dramatically boosting productivity in the process -- is what you extend. VMware is the market leader in virtualization, but Microsoft, through its Hyper-V product, wants a piece of the pie. Why not buy whole the pie instead?

Microsoft already has close to $24 billion in excess cash. Soon, it'll have another $3.75 billion more. That's one heck of a charge card, Ballmer. Time to go shopping.

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What would you spend Microsoft's newfound debt capital to acquire? Use the comments box below to tell us what you think.

Netflix is a Stock Advisor selection. Google and VMware are Rule Breakers recommendations. Microsoft is an Inside Value pick. Try any of our Foolish services free for 30 days.

Fool contributor Tim Beyers had stock and positions in Google and stock positions in IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy might have over-caffeinated this morning. Nah. Who's up for another cup o' joe?

Read/Post Comments (2) | Recommend This Article (4)

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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 May 12, 2009, at 4:35 PM, dastaub22 wrote:

    Clearly it was not the unthinkable to Microsoft other wise they would not have done it.

  • Report this Comment On May 13, 2009, at 12:50 PM, kscguru wrote:

    I have yet to understand the blithe optimism of financial "experts" about company purchases such as this.

    SAP as an acquisition target for "closer ties to Microsoft's SQL Server"? That's a step in the wrong direction, Microsoft's databases run second place to Oracle's and are used mostly by shops too small to afford Oracle licenses. One doesn't attract customers by forcing "upgrades" from tier-1 infrastructure they happily bought to tier-2 lock-ins with Microsoft.

    Facebook's success comes from being small and independent, and appealing to the younger generation. How long do you think trendy Facebook users would tolerate a site owned by Microsoft the stodgy megacorp (where their parents own stock)?

    VMware? I interviewed at VMware four years ago, asked about what being owned by EMC meant, and I got one universal answer: overwhelming relief at NOT being at risk of a MSFT buyout. Microsoft would be lucky to get half the engineering staff to stay, and most of that would be people too junior to jump ship.

    These are ideas that look good in a superficial, one-sentence musing that looks only at next quarter's balance sheet. Not good long-term investing.

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