By DAVID MOON, Moon Capital
August 1, 2004
Last week, Microsoft announced it is going to distribute $75 billion of cash
to shareholders, via a special dividend and share repurchases. The implications
and lessons are numerous.
The first lesson of the special payout is the reminder that shareholders own
the company, including all of its assets. If Microsoft distributes $75
billion to its shareholders, that will equate to about $7 a share. But
when the announcement was made, the stock increased less than 50 cents.
Why? Because the Microsoft shareholders already owned that $75 billion,
whether it was distributed or not. When the shareholders eventually
receive the $75 billion, they are merely being given an asset that is already
theirs. In a perfectly efficient market, the stock will actually decline
when the dividend is paid, reflecting this shift in ownership form.
If a person sells his house, then keeps the net proceeds in his bank account,
he hasn't increased his net worth. He simply transferred the asset from
one asset form (real estate) to another (cash.) The Microsoft dividend may
put more cash in your pocket, but it only redistributes assets from a corporate
form to a personal one.
But the most newsworthy
observations from the Microsoft action are about the company's
business. The Microsoft business model is incredibly
profitable. The company generates over $10 billion a year in excess cash,
even after paying all of its expenses, including significant research and
development costs. Microsoft is a cash machine. It generates more
cash per year than every drug company, automobile manufacturer and general
retailer (including Wal-Mart) in the country combined.
But if we apply the business life cycle model to Microsoft, one has to wonder
if it has reached its full maturation point, where it no longer has
extraordinary growth prospects, but is merely a cash cow. If Microsoft is
returning $75 billion to its shareholders, that means Bill Gates can't find
anything attractive in which to invest. Don't you think he would continue
to build his empire if he thought there was something he could buy or build or
create with all of that cash? He doesn't need his part of the $75 billion
distribution. He already committed to giving it to charity. I'm
convinced this special distribution means Microsoft sees its growth
opportunities dwindling, and that shareholders may have more profitable personal
investment opportunities than does Microsoft.
It makes sense. The company is now so large that only a huge investment
can make any impact on the Microsoft bottom line. There simply
aren't many possible investments of that size.
The other problem is legal. Any sizable technology business Microsoft
might buy would raise objection from antitrust regulators. Microsoft has
enough resources to buy every PC and television manufacturer in the world.
Do you think the government would allow that? What about broadcasting or
cable TV? Nope, that's not going to happen.
If you own Microsoft, enjoy your special distribution. But don't expect
the underlying business growth of the last twenty, or even ten years to
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).