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Thursday, August 7, 2008

Microsoft out of ideas?

"Sometimes money buys you everything and nothing."
-- Prince, from the song Condition Of The Heart
Yesterday Bloomberg reported an analyst's expectation that Microsoft (MSFT) would institute a $20 billion share buyback program.

There hasn't actually been a formal announcement from Microsoft that I have seen, yet the news has rapidly spread around the Internet as the Bloomberg report was picked up by bloggers, news sites and technology sites.

UBS analyst Heather Bellini expects Microsoft to complete the repurchase over the next three months, and that the amount is at least five times larger than its average share buyback per quarter in the last fiscal year, according to the Wednesday Bloomberg article.

So what does this mean?

Earnings --

When companies buy back shares, net income is spread across fewer shares. This results in an apparent increase in earnings per share even if total income stagnates. A buyback of this size might raise Microsoft's EPS by as much as $0.10 per share.

Strategy --

The size of this buyout would be a confirmation that Microsoft is out of ideas. With the deal to acquire Yahoo! apparently dead, Microsoft seems to have nothing else to do with the money than to buy back shares. To me this is an indication that there was no plan beyond buying Yahoo! and that Microsoft has no significant new initiatives in the pipeline. The reliance on doing a deal shows that Ballmer and Icahn are birds of a feather with no real strategy beyond buying and selling assets.

For those of you who would like to see a resurgent Microsoft stock trading higher based on organic growth and compelling new product introductions, you may have to wait for quite a while. In the meantime, financial shenanigans appear to be the rule.

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