Microsoft's watershed cashback offer

Richard Holway, Ovum Director, in cooperation with Phil Carnelley, Research Director

Microsoft has announced the biggest 'cashback' offer in corporate history. Over the next four years it is going to return over $75 billion to shareholders. $30 billion will be in the form of a share buyback scheme - raising earnings per share. Then there's a special one-off $3-a-share dividend to be paid early December 2004 - amounting to $32 billion. And it has doubled the normal dividend to 32 cents per share.

If all was paid at once, this would more than exhaust Microsoft's $60 billion or so cash mountain. But as it's still increasing at a stonking $12 billion per year at present, Microsoft will have plenty left over for the odd acquisition - "a high class problem to deal with" as CFO John Connors put it. Indeed, at the end of the four year period (assuming the cash continues to flow in - and why shouldn't it?) there will be $10-$20 billion in the bank.

Readers might recall that we started a crusade to get IT companies to consider paying dividends as part of our "IT as a maturing industry sector" theme a few years back. Many have now done so but Microsoft may well be seen as the watershed. Now, surely, it'll become the norm. Cisco, Oracle, Dell - all will be pressured to fall in line. This is the consequence of the maturing industry - investors can't bank on ever-increasing stock prices based on a market growing faster than the economy. Dividends are the reward they'll be looking for.

Ironically, rather than being praised for its move, Microsoft's offer is already being criticised in some quarters as 'not enough'. The proposed increased dividend represents a yield of just 1.1% - about half where it should be compared with, say, the S&P 500 average. (HP is 1.6%, though IBM is about 0.8%, and SAP is 0.6%.) So the special $3 per share cashback could just be put down to 'catch-up'.

The share buyback is more difficult. Basically it's an admission that Microsoft has run out of ideas on how it can boost future growth.

• Companies boost growth by:
• increasing market share for their core offerings - difficult for Microsoft!
• in-house/organic development of new business areas - Microsoft has a mixed record for that
• Acquisitions - Microsoft's tried and tested way in the past. In the main, though, it has bought small companies and used its amazing distribution channel to bring them to the mass market.

So, in many ways, the Microsoft announcement could be viewed as a bit depressing for the industry. Microsoft can't find anything more interesting to invest in than - Microsoft.

To grow much faster than the economy, Microsoft thus needs some innovative ideas, and ideally, a source of growth OUTSIDE the conventional IT industry. Its forays into set top boxes, satellites, wireless, consumer games and Windows on office equipment have met with limited success.

Ten years back, Microsoft shares were $3 as they entered their peak growth phase. They peaked at $60 at the height of the 1999/2000 dot.com frenzy. For the last two years they have traded in a disappointing $24-$30 range. After the cashback announcement they closed at $28.32.

Whether you consider this is Microsoft's final admission that it (and by implication the IT industry) is now 'mature' or whether you take it as the first admission that Microsoft is in decline - we will leave to you.

This article was written in cooperation with Phil Carnelley and is taken from Ovum's EuroView service.