At Microsoft Subnet, we've written about frustrated Microsoft shareholders before. Today, we begin a multi-post series on the topic. This series is inspired by Craig Montgomery of The Crandrea Group, which is creating a grassroots shareholder activism movement. We'll get into the details of what the Crandrea Group is gunning for in a later post, but to summarize, he wants:
1) Microsoft to make a major acquisition of a telecommunications company, giving it instant dominance in the game-changing mobile market.
2) the company to stop squandering billions of dollars in R&D and buybacks that are having no affect on its stock price or its future business prospects.
3) heads to roll in Microsoft top leadership.
Montgomery contacted Microsoft Subnet a few weeks ago, before the layoffs, before the stock hit a 10-year low of about $16 last week and told us it is time for investors to band together and push for change. While you may not agree with some of Montgomery's ideas of what Microsoft should do, his underlying analysis of Microsoft's problem is worth understanding.
Normal fluctuations in the stock price of a vendor shouldn't concern enterprise customers all that much. And in this economy, even some of the heartiest stocks prices have taken a beating. But there are times when the enterprise needs to pay attention. When shareholders grow frustrated, a company's management tends to turn its attention to pleasing them, instead of servicing customers. Should their actions fail to impress investors, heads roll. Big changes at the top can make for unstable product development and support. In Microsoft's case, customers are also looking at 18 months of Microsoft employees nervous over layoffs. Think about how Microsoft handles customer relations and product quality issues even when it isn't facing such pressures ... 'nuf said.
So, what are investors miffed at? By 1999, Microsoft owned the desktop, the browser, the office productivity software markets. If you invested in Microsoft stock sometime that year, it set you back roughly $35/share. Since then, and over the past four years particularly, shares have traded in a narrow price range in a generally downward trend, drifting below $30 and now below $20. Earlier this week, some investors on message boards were speculating that Microsoft stock could be heading for $10 per share and be ripe for short selling. That's gossip, of course, but astounding about a stock that was once legendary for how many millionaires it created.
To be fair, Microsoft isn't the only Fortune 50 IT stock under pressure today. HP is trading at less than $20 compared with a 52-week high of over $77. IBM is trading in the $90's compared to a high of $130 and so on. But what is getting investors' goats is that Microsoft hasn't had that big of a tumble. According to financial reports on Yahoo Finance, Apple was trading at about $10 in 2002 and today is at about $85 (hitting a high over $200 in 2007). Red Hat was at about $5 in 2002 and is at about $13 (after a high of over $30 in 2006). In 2004 when Google began to trade, its stock was valued at about $100 and now trades at about $300, after a high of about $700 (which was insane, we'll give you that).
Complained investor Michael McDonald in a post on TechFlash in November:
"It is not unreasonable to expect Microsoft, the world’s software leader, enjoying a high-margin monopoly on more than 90 percent of the world’s computers, to have annual stock appreciation of 9 percent over this span of eight years. At this compounded rate, MSFT should now be selling at twice the price I originally paid. Instead, it is selling at half the price I paid. (The current economic meltdown hasn't materially altered the underlying, long-term price trend of MSFT shares)."
Enter Craig Montgomery of The Crandrea Group. Montgomery has no direct relationship to Microsoft and will not say how many shares he controls. By Wall Street's standards, he would be a little guy and that's OK by him. "Management is equally accountable to the small shareholder with $100 invested as they are to large firms with millions of shares," he says.
Montgomery contends that management has squandered billions since 2004 trying to generate shareholder value to no effect. Microsoft has completed a $40 billion buyback and, in September, launched a second $40 billion buyback. With dividends, Montgomery calculates that Microsoft has spent about $115 billion on tactics to woo the share price up. It has also spent massive amounts in R&D (see chart) and pursued numerous acquisitions "including the proposed 65% premium bid for Yahoo. "
Unhappy investors like to point to Apple's success when wagging the finger of shame at Microsoft. But Montgomery notes that Microsoft's share price isn't so hot even when compared to other software companies. He says: "Oracle in 2004 was trading at approximately $14 per share. Prior to the market volatility of 2008 the shares were trading at $24 per share. Within that period the shares primarily display an upward momentum. Therefore prior to the downward trend of the market, Oracle increased shareholder value by 58%."
Then there's SAP, which during 2004 was trading at about $40 per share grew to about $60 per share, reflecting a return of 66% within the four-year period, to Montgomery's way of thinking.
Montgomery gives Microsoft credit for a three-month "minor rally," he says, where its share price reached about $40 during the start of 2008 in conjunction with the initial announcement of the Yahoo bid. But as the Yahoo drama unfolded and eventually failed, Montgomery spied what he describes as "an exodus" of shareholders. The stock drifted into a downward trend that wasn't helped by last week's second quarter announcement.
For four years, shares have teetered at about $25 per share, he says. This is despite the fact that the company has grown revenue and earnings, and grown them well -- despite dividend payouts and billions in buybacks, too.
The failed Yahoo bid revealed the underlying problem, Montgomery says: a total failure for any "rational" long-term planning, he says. While Microsoft has completed some expensive acquisitions, such as the $800 million purchase of TellMe in 2007, from an investors perspective, that means nothing. Microsoft has a long track record of spending billions of dollars to create business units that are only selling millions of dollars worth of stuff. That's not that kind of marriage that makes an investor's heart go a flutter.
Next up, we'll take a closer look at Microsoft's acquisition strategy and why a very radical rethinking of it is what The Crandrea Group's movement wants. Also see part two in this series Angry shareholders say Microsoft squanders billions on pointless R&D projects
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