NetTrends: Is "less" more for Microsoft?
By Dick Satran
SAN FRANCISCO, Sept 27 (Reuters) - What made Microsoft Corp. President Steve Ballmer take a shot last week at the ``absurd' prices of technology stocks, including his own?
One fellow Microsoft (NasdaqNM:MSFT - news) exec, Group Vice President Jeff Raikes, on Tuesday joked to an investor conference that the balding Ballmer was just ``having a bad hair day' when he trashed the stocks.
But there are good, hard reasons why Microsoft is dismayed by the booming technology stock rally, and Microsoft hasn't done anything to distance itself from the comment since Ballmer made it.
Indeed, the relentless rise of tech stocks has posed a serious challenge for Microsoft, some analysts say, even as it's added to the personal holdings of Ballmer and his boss, Bill Gates, who were already among the world's wealthiest men.
For starters, it's made it harder for Microsoft to match its upstart competitors in deal-making and it's causing the company to lose some of its best talent to ``dot.coms.'
``There are definitely reasons why Microsoft would want the stocks of all those Internet companies lower,' said James Feuille, head of investment banking at Volpe Brown Whelan.
Microsoft has lost a steady stream of very bright managers to the lure of the Internet, some of whom have already made it big with their own startups, including Peter Neupert of Drugstore.com (NasdaqNM:DSCM - news), Rob Glaser of RealNetworks (NasdaqNM:RNWK - news) and Naveen Jain of Infospace (NasdaqNM:INSP - news).
It also faces growing threats as competitors bulk up with new technology and broadening customer bases. Yahoo! Inc. (NasdaqNM:YHOO - news), America Online (NYSE:AOL - news) and Excite AtHome Corp. (NasdaqNM:ATHM - news), its three most important Internet competitors, made multibillion-dollar acquisitions this year that were larger than any Microsoft has ever taken on. AOL acquired Microsoft archrival Netscape for $9 billion. Yahoo bought broadcast.com and Geocities.com for $8.7 billion, and AtHome won Excite in a $7.2 billion deal -- all paid for with stock.
``The fact their valuations are so high gives all of those companies an incredibly powerful acquisition tool. They can afford to gobble up other companies more easily than Microsoft,' Feuille said.
With investors expecting Microsoft earnings to rise by 30 percent or more each quarter, the company can't afford the impact of such deals -- though the Internet stocks, with their ``negative earnings,' don't have that worry. Recently, Microsoft has said that some of its Internet holdings will be floated as separate stocks.
In one estimate, carried by Red Herring Magazine, the value of the 135 Internet stocks already traded is about $410 billion -- very close to the size of Microsoft, at about $450 billion. But the Web stocks had a combined loss of $3 billion -- while Microsoft annual earnings are over $7 billion.
In the upside-down world of the Internet economy Microsoft's earnings are almost a hindrance. It has $16 billion in cash that it's spending mostly on small software or ternet-related deals, or larger-scale investments in broadband Internet access.
But with a few more days like Thursday's fall, Microsoft could regain the financial edge it's lost during recent years. It could start spending some of that cash on lower-priced stocks. The elimination of so-called ``pooling of interest' accounting, expected at the end of next year, will tend to make cash deals more practical than stock transactions. The company is also the biggest buyer of its own shares, for employee option plans, so a lower stock price would reduce costs there as well.
But did the market fall, or was it pushed? ``I don't think Ballmer is that duplicitous,' said Louis Mazzacchelli of Gerard Klauser Mattison. ``I think he was just speaking from the heart, and these stocks are way, way overvalued.'
As Ballmer himself put it, ``There is such an overvaluation of technology stocks, it is absurd. I could put our own company and others in that category.'
Ballmer is known as the gung-ho salesman who is the cerebral and cool Gates's alter ego. Sometimes, he shoots from the hip. Just to make sure Ballmer meant what he said, I asked him after his address to the Society of American Business Editors and Writers what Microsoft's value should be. His answer left little room for debate.
``Less,' he said emphatically, adding, ``We're trading at a very high multiple.' Finally, he said, ``I used to believe in the theory of perfect markets, but I no longer believe that.'
The stock market was less than perfect that day, whether because of Ballmer's bearishness or fallout from the rising Japanse yen. It fell in one of its biggest declines ever, led by plunging tech stocks.
Microsoft lost 5 percent, costing Ballmer $1 billion of his $20 billion holding of Microsoft stock. That's called putting your money where your mouth is.
(The NetTrends column appears weekly. E-mail Dick Satran at Dick.Satran(at)reuters.com) |
