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Cringely: Microsoft should transition itself into a Berkshire style conglomerate


Mark Jr.
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What Microsoft should do

http://www.cringely.com/2011/05/what-microsoft-should-do/

 

"Buffett used his cash flow to buy a share in the futures of many other companies. Like Peter, he became a fisher of men. Following such a strategy is a very real option for Microsoft.

 

There’s no lack of money for Redmond to diversify. For more than a decade the company has reliably thrown-off at least $1 billion each month in cold cash that could be used for diversification without impacting in any way the day-to-day operations of Microsoft. But what I propose is something more than that — deliberately shaping Microsoft operations to maximize cash flow for external investments. If Microsoft eliminated its many products that don’t make money that would free at least another $1 billion per month and maybe a lot more."

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That's an interesting idea, but I fear changing a huge company's culture is a lot harder than most would think, and most would think it very hard.

 

Buffett shaped Berkshire into what it is pretty much from the start. Steering Microsoft in a totally different direction now that it is this big is something else...

 

Would be great if they could pull it off, though, but who here thinks Ballmer could do it? And Gates won't leave his Foundation.. But I don't think they can pull it off, so it's a moot point. I'd rather see buybacks when shares are priced low and dividends (eve with tax hit) when not.

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Why wouldn't you want the cash in your own hands?  I think someone like me benefits by having a smart person make my decisions, but some of you guys are bright and talented.

 

 

LOL, I think you would be among the group which would benefit the most. Aw where is Bronco, I would like to see the dividend vs. buyback debate again.

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Why wouldn't you want the cash in your own hands? 

 

Absolutely. With some notable exceptions, shareholders get the short end of the stick in diversification (often diworsification, to steal a Peter Lynch catchphrase) at corporate level. Let we do it the way that best fits our individual goals and risk tolerance.

 

 

 

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Why wouldn't you want the cash in your own hands?  I think someone like me benefits by having a smart person make my decisions, but some of you guys are bright and talented.

 

 

LOL, I think you would be among the group which would benefit the most. Aw where is Bronco, I would like to see the dividend vs. buyback debate again.

 

I'd like to see them do either a large repurchase of shares or pay a large special dividend, preferably the former at current prices.

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That is one the most stupid idea I have heard. Peoples are complaining that Microsoft is too spread in a gazillion of products that lose money and yet they embrace the idea of having it be managed as a conglomerate. Microsoft has enough on it's plate keeping up with competition that the last thing I would want from them is to start acquiring non-core operating companies. I like when a company is focused on it's objective so they can stay leaders. Apple has a very focused strategy and so far it seems to work pretty fine for them.

 

As for what to do with the money Eric has it perfectly straight. Why would you want MSFT to keep your money and invest it for you? I would much rather have a dividend/buyback s I get back the money. What I do with that money after is my own choice... you can invest it in Fairfax, BRK or whoever you want why would you want to lock it at the original corporation.

 

There is only one Buffett and only one BRK, you can't reproduce it's success without another Buffett.

 

BeerBaron

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My idea of what they should do is this:

 

1)  Borrow at low rates to buy back shares (they are AAA so they get the best rates) in tender offer (they've done a large tender offer before)

2)  Keep an offsetting amount of cash overseas

 

They can always pay the loan off later on, for example, when the US govt eliminates the excessive tax on repatriated earnings.

 

Can't hurt.  It's not like it's risky in any way.

 

Even if they don't lift the tax on repatriated foreign earnings, the spread they'll make on borrowing cheap to buy shares will cover that tax after just a few years if they need to pay off the debt with that foreign cash.

 

They likely would be borrowing at interest rates similar to JNJ quality companies, so they could use their foreign cash to buy such bonds and the earned income would wash out against what they'd be paying out in interest.  Given the lower foreign tax rates on that income vs the tax deductions at higher US rates, this might even work out to positive net interest income.

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My idea of what they should do is this:

 

1)  Borrow at low rates to buy back shares (they are AAA so they get the best rates) in tender offer (they've done a large tender offer before)

2)  Keep an offsetting amount of cash overseas

 

They can always pay the loan off later on, for example, when the US govt eliminates the excessive tax on repatriated earnings.

 

Can't hurt.  It's not like it's risky in any way.

 

Even if they don't lift the tax on repatriated foreign earnings, the spread they'll make on borrowing cheap to buy shares will cover that tax after just a few years if they need to pay off the debt with that foreign cash.

 

They likely would be borrowing at interest rates similar to JNJ quality companies, so they could use their foreign cash to buy such bonds and the earned income would wash out against what they'd be paying out in interest.  Given the lower foreign tax rates on that income vs the tax deductions at higher US rates, this might even work out to positive net interest income.

 

Why not use their foreign cash to buy back their shares on the foreign market, would that be considered as repatriated money by the IRS?

 

BeerBaron

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My idea of what they should do is this:

 

1)  Borrow at low rates to buy back shares (they are AAA so they get the best rates) in tender offer (they've done a large tender offer before)

2)  Keep an offsetting amount of cash overseas

 

They can always pay the loan off later on, for example, when the US govt eliminates the excessive tax on repatriated earnings.

 

Can't hurt.  It's not like it's risky in any way.

 

Even if they don't lift the tax on repatriated foreign earnings, the spread they'll make on borrowing cheap to buy shares will cover that tax after just a few years if they need to pay off the debt with that foreign cash.

 

They likely would be borrowing at interest rates similar to JNJ quality companies, so they could use their foreign cash to buy such bonds and the earned income would wash out against what they'd be paying out in interest.  Given the lower foreign tax rates on that income vs the tax deductions at higher US rates, this might even work out to positive net interest income.

 

Why not use their foreign cash to buy back their shares on the foreign market, would that be considered as repatriated money by the IRS?

 

BeerBaron

 

I almost said the same thing, but then figured they would already be doing that were it possible.  Because CSCO which loves to buy shares back would have done that with the foreign cash pile and paid dividends with the domestic one.

 

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They borrowed before to buy back shares, and I don't think that was a good use of capital.  They could retire plenty of shares just from their normal operating cash flows.

 

As far as allocating capital, I'm not suggesting that they go outside of their circle.  What's stopping them from buying into other undervalued tech companies, rather than competing head on?  They could buy Google stock or even more Apple stock whenever it seems undervalued.  There are other tech companies that support their products such as Dell or HPQ which seem to be undervalued.  They could allocate capital into Cisco.  That might be a better alternative to pouring half a billion a year into Bing losses or creating a Windows tablet that probably won't displace the iPad.  

 

Hell, they could buy all of LVLT and finance their debt receiving the same 12% a year that Fairfax was getting.  In the meantime, they would own the backbone that supports all of their competitors.  It would also make ValueCarl really happy!   ;D  Cheers!

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Well one reason I think they can't just buy google or apple stock is their monopolistic history.  People would be crying foul if they tried to buy those 2 in particular, although I wonder if they still own the Apple stock they bought back when Steve Jobs first came back to Apple.  That said I did comment about this on a thread a long time ago, in particular I found it odd that Bill Gates, being on BRK's board didn't push MSFT in this direction..

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Guest VAL9000

Hell, they could buy all of LVLT and finance their debt receiving the same 12% a year that Fairfax was getting.  In the meantime, they would own the backbone that supports all of their competitors.  It would also make ValueCarl really happy!   ;D  Cheers!

Then we could merge the MSFT and LVLT threads and learn just how scalable the Simple Machines Forum software really is :D

 

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hrm, but microsoft is a software company, has always been one.  Apple was revived because apple went back to what apple was about, it went back to its roots, which was making revoluationary, easy-to-use, seemlessly-integrated hardware+software products. 

 

the common theme in this thread seems to be what microsoft should be doing with its CASH, but seems to overlook the fact that its most important assets are its employees and its customer base, just like most software and tech companies. 

 

Microsoft has losts its focus on making it a place where passionate software developers wants to come to change the world through software, and really stopped focusing on the user experience.  That could explain most of its failures imo.

 

I left microsoft, and many of my friends left microsoft, because the place does not have that vibe anymore.  If you ask me whether making 20%/year is more exciting or seeing the result of my work be used by many people is more exciting, it most definitely is the latter for me.

 

Microsoft's first priority should be to gain its mojo back, and become a place where passionate developers want to go work at to create great products for its huge customer base.  If it doesn't do that, it will fail slowly. 

 

To become a conglomerate and putting capital allocation first, sends such a crappy message to its developer employees.  It tells them that the company now cares more about capital allocation than developing great products.

 

I remember one of Ballmer's internal emails that started with something like "as a public company, we first and foremost have a duty to our shareholders..." or along these lines.  That did not motivate me at all, I would have been 100x more motivated if he said "as a Products company, our first and foremost duty is to our users".

 

Microsoft needs to pay more attention to its users, then employees, not its shareholders first.  That's my 2c on it.

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