A friend of mine who works for a software firm noted the other day: "People have not given enough thought to this amazing fact: Bill Gates completely missed the rise of the Internet -- the biggest computing trend of the 1990s. But once Microsoft saw which way the wind was blowing, it simply spent enough money to catch up." He's right. Most companies do not survive such blunders. That Microsoft succeeded is a testament to a great many things, but most of all it's a testament to cash. Gobs of it.
The trouble is, companies have traditionally been penalized for hoarding cash. Investors wanted them to keep what they thought they could profitably deploy, and return the rest. That's where measures such as Return on Assets came from: People wanted to know that companies were deploying their assets profitably. If they weren't, then good corporate governance demanded that they return excess capital to shareholders. Microsoft broke that mold, and other companies, most notably Cisco
The argument they make is not without merit -- these are not the capital-intensive businesses of yore, and having the cash means the ability to be flexible. As long as these companies grew like weeds, investors bought into this logic. But as Austin Powers once said, "That train had sailed." Microsoft responded this past year by instituting the first dividend in company history, which now sits at $0.16 per share. That returned $1.7 billion to shareholders. But that's not even a drop compared to what sits in the vaults in Redmond -- it doesn't even cover the 4%-6% growth management expects to achieve on its existing investments.
Speaking at a Goldman Sachs
This makes sense to a degree, but that degree sits substantially below the $50 billion threshold. Does management honestly think that either of these cases, at their most negative outcome for the company, would come anywhere close to that level of penalty? Microsoft could, with the stroke of a pen, offer a $2 per share dividend and still have well over $30 billion in the bank. That's 34 times the business' 2003 capital expenditures. It could offer a $4 per share dividend and still have plenty of operating capital.
The lawsuits are out there, and Microsoft may lose them. But shareholders don't require a $50 billion bond just in case.
I'm very happy to see that Microsoft management is addressing this.
Think Microsoft should keep building cash? Think it should buy a small island? Like Maui? Come talk about it on the Microsoft Discussion Board (free trial required).
Bill Mann does not own any companies mentioned in this article.
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