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Brier Dudley's blog

Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

November 22, 2010 at 10:58 AM

Take Microsoft private: It’s been considered

(Here’s today’s column, about why Microsoft should go private. I may have buried the news, that people in Microsoft’s treasury group have run the numbers …)

With interest rates at historic lows, maybe it’s time for Microsoft to refinance.

Seriously, the company is unable to convince investors that its business is doing well. So why not say to hell with Wall Street and take the company private?

Microsoft has management challenges and seems less nimble and adventurous, but it’s steadily grown the business through the downturn.

The company is now so big that its stock will never perform the way it did in the 1990s.

It’s also getting harder to explain all the different things it’s building, especially when analysts and the media are more interested in the gadget du jour. Executives seem tired of telling their story over and over, only to be asked about the iPad and mocked for the Kin.

With the stock stuck under $30, investors no longer have the patience to wait the decade or so it takes Microsoft to build humongous new businesses, as it did with servers and is doing with Xbox.

Breaking the company apart or raising the dividend further may give investors a quick hit, but they’d soon be begging for more.

They’ve already forgotten that last month Microsoft reported 51 percent profit growth, and that it gave shareholders more than $1 billion a month over the past year through dividends and stock buybacks.

Instead of throwing free cash into that black hole, Microsoft could use it to cover refinancing costs and share the rest with employees. It would be a better incentive than middling stock awards and could even start churning out Microsoft millionaires again.

Going private isn’t that far-fetched. Dell’s been thinking about this and will reportedly discuss it again during a board meeting next month.

Public offerings get all the attention, but 1,199 companies went private over the past decade, including 92 with a combined value of $60 billion so far this year, according to Thomson Reuters.

Thumbnail image for going private.jpg

As of Friday, Microsoft’s market cap was $219.8 billion.

To get your mind around this, pretend that’s a mortgage (it’s easier if you lop off six zeros).

First, deduct the $24 billion in equity still held by Steve Ballmer and Bill Gates.

Make it a cash-out refi – take out 15 percent to sweeten the deal for shareholders. Use the cash on hand if they need more.

You’re looking to borrow about $225.5 billion.

If Microsoft refinances at 5 percent – roughly what it sold 30-year bonds for last year – its monthly payment would be about $1.21 billion. Last year the company had profit of about $2 billion a month before taxes.

It looks even better if Microsoft figures out a way to get the principal down. Perhaps a few big shareholders would be interested in a limited partnership that owned Microsoft outright.

Gates and Ballmer together own about 11 percent of the shares. About two-thirds of the rest is held by about 1,700 institutional investors and mutual funds.

To go private, Microsoft would have to reduce the number of shareholders below 300.

Maybe one could be the Gates Foundation. Imagine what it would do for the company’s reputation and morale if people buying Windows knew a portion of the profits would directly benefit the world’s poor?

Everyone would love that, except Apple and that person at last week’s shareholders meeting who asked Gates to give more to investors and less to sick and impoverished children.

I’m not the only one thinking about taking Microsoft private.

The notion has crossed the minds of a few people in Microsoft’s internal treasury department, according to Bill Koefoed, the company’s general manager of investor relations.

“Sure, in the back of people’s minds. We’ve thought about it,” he said.

But it’s apparently not something the chairman of the board is interested in pursuing.

For the deal to work, it would need the two largest shareholders – Chairman Gates and CEO Ballmer – to hang on to their stakes and go for it, and lately they’ve been selling millions of shares.

It won’t be too many years before both billionaires move on, and who wants to refinance when they can taste retirement?

I wonder, though, if Microsoft’s next generation of leaders will be as immune to Wall Street sirens.

Going private seems like an opportunity for Gates to develop another vaccine, to keep Microsoft’s long-term vision clear and to protect it from infectious greed.

If he takes a little cash out from the refi, he could probably get one of those big TVs, as well.

Comments | Topics: Bill Gates, Billionaire techies, going private

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