on msft
recently i sent a friend of mine a few articles/blog posts about steve ballmer, msft and the skype deal. needless to say, the articles didn’t come down on the positive side for steve and msft.
i sent them because i knew it would spur some good thinking and perspective.
see the response:
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In 1999 the year before Ballmer took over as CEO, MSFT earned $7.785 billion in net income. In fiscal 2010, they earned $18.760 billion. So, over that 11 year period, Microsoft grew net income at 8.3% per year. Ballmer should not be faulted for idiot tech investors overpaying for the company’s shares in 2000. And for context, Apple earned $14.013 billion in its 2010 fiscal year. So, Microsoft generated 34% more profit than Apple in their respective fiscal 2010s. They did so with far less hype though, and you can’t put a price on hype.
Also, Microsoft paid for the Skype acquisition with overseas cash, which they would have to pay approximately 30% tax on if it were repatriated. So, while I think they should have done a better job of negotiating the deal price, the $8.5 billion in foreign cash was really $5.95 billion ($8.5 x .7) in value when you factor in the value of paying with foreign cash. In addition, Microsoft will likely use the $8.5 billion basis created by the deal to employ a tax mechanism referred to as the “Deadly D” to repatriate up to an additional $8.5 billion of cash tax-free, which is worth $2.55 billion ($8.5 billion x .3). It’s idiotic that the morons in Washington haven’t closed that loophole yet, but they have not. So, you could argue that net of tax benefits Microsoft paid $3.4 billion for Skype. Independent of the Microsoft deal, Skype was projected to earn somewhere between $300 million and $330 million in operating earnings next year, so Microsoft paid between 10 and 11.3x forward operating earnings for an asset that is growing at a nice rate and can compound value essentially tax-free (probably between a 5 -10% tax rate) overseas.
The most appropriate criticism of Ballmer would be “anyone could have taken over Microsoft in 2000 and gotten it to where it is today.” That would be a fun debate to have with you guys over drinks sometime, but history is full of technology executives who have ruined (in a relative sense) themselves and their businesses trying to stay en vogue rather than putting the cash generated by their businesses to its highest and best use and creating shareholder value. Hubris has been the kryptonite of countless technology executives, and to this point, Ballmer has been able to refrain from allowing hubris to destroy his company or his wealth. The nice thing about business is that “it’s about the money,” so as a final bit of context, let’s look at the 2011 Forbes list. Gates has a $56 billion net worth. Ballmer has a $14.5 billion net worth. Paul Allen, $13 billion. Jobs comes in at $8.3 billion. Larry Page and Sergey Brin, $19.8 billion each. Eric Schmidt, $7 billion. Jeff Bezos, 18.1 billion. Zuckerberg, $13.5 billion. So, maybe if all of these en vogue tech guys work really hard over the coming years, they can turn some of the love they receive in the blogger community into wealth and be mentioned in the same category with the wealth created by Microsoft. Gates isn’t particularly concerned though, while those guys are stroking their egos and trying to disguise their complexes, he’s focused on charitable endeavors.
