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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Focus on changes
No offense to Mr. Montgomery and his ideas for change, but he needs to focus on what ads value to this company. A mature MSFT needs R&D to develop new products and ideas to ensure they have something to offer a revenue stream 10-20 years from now when office and operating systems are all free. Its hard to believe investors would complain about a company who is funding large amounts of R&D and has initiated 2 major buybacks, this is the problem with US investors. What do you want, MSFT to layoff 50% of all workers, ride office and Windows for 3-5 more years and fold as a company?
Why doesn't Mr Montgomery
Why doesn't Mr Montgomery take his whiny ass and invest in GM, Ford and Chrysler.
New Strategy
Anon states "a mature MSFT requires R&D".
We are not oppossed to R&D. We certainly understand R&D spending. However, as we argue within our campaign which can be accessed via this blog, Microsoft has historically deployed billions on R&D and has failed to remain competitive.
The company is deploying approximately $7 billion to R&D and has failed to acheive market share and innovation.
Additionally, if you look at historical share data, since 2004 the shares have reamined flat. Therefore, the company has deployed $40 billion in a failed bid to elevate share value. However, the dilemna is the company has announced it will deploy another $40 billion in this strategy.
It is more advantageous to use the current market conditions and accelerate growth through acquisition. The $40 billion can be better deployed to acquire companies to elevate share value than deploy another $40 billion on buybacks.
Ridiculous
This is a ridiculous argument made my people who have no idea what the software industry is all about and its real value. Markets look at things differently, and that my friends, is your choice to view it however you want. However, its insane to think your advice makes any sense whatsoever. By your argument, the Server & Tools business (the best performer for quite awhile now) would not exist. MSFT, under your advice, would have pulled the plug before this business ever got started. Stick to what you know - not much.
Slow and Steady... Maybe??
Look back at how IBM dominated the market before a small company with some ideas came along and in over a few years ended up dominating the PC market. Maybe Microsoft is trying to avoid that situation. Admit it, they are huge! So innovating is hard and I think the pool of start ups with good ideas is getting small or they are all open-source and writing software for linux or some other web based app.
The problem with Microsoft they have their hands in everything adn that's a hard thing to do, sure we can counter that Apple has it's hands in everything too but guess what they control their hardware and their OS so really their job is easier.
As for spending the billions on R&D, I think that's needed, look at the number of patents IBM filed this year and I believe MS was up there this year too. Does IBM market all of their grand ideas? No they license it out to people. Microsoft is likely doing the same thing and in a lot of cases the technology they are coming up with right now isn't marketable due to high manufacturing costs.
I've noticed the downward spiral of their stock but look at the some of the over-valued stocks that are in dire need of a correction, (google is a prime example of this).
The economic downturn isn't going to help because short to mid-term and maybe they are looking for that bargain acquisition, it's too soon in the new year to really tell. I can think of one Telecom purchase they could make that has a long standing good working relationship with them. :)
The biggest problem with Microsoft's dominance of the desktop both at home and in the enterprise, along with their server dominance, is that they are continually being attacked on all sides. Oracle's jump in to virtualization, the Xen option, VMWare, Citrix. Taking a slow and low approach (pragmatic approach might be best for them).
They're biggest problem which I think has affected their stock price because let's be honest, the Microsoft brand has never had a great image. Face it I think in this day and age, people buy stocks based on their popularity and image... Think high school elections. :) Their failed attempt to make Microsoft "Cool" failed horribly... Did they ever get rid of that high priced Ad agency??? I would have!! Apple does well with it because they have/had celebrity CEO, Oracle, same thing, Google same thing, Linux has it's own following, VMWare although maybe not from a CEO perspective was all that popular but they come across cooler than Microsoft.
Bill Gates had some celebrity stigma maybe not the same type but it's better than the tantrum throwing Ballmer. Who wants to invest in a company like that??
As for the Yahoo debacle... Ya the search engine war is over, they need to face facts that there are some companies out there that will do something better than them and sometimes being 2nd or 3rd is a good thing because eventually #1 will mess up. :)
Just a thought.
Why did he buy MSFT in the first place?
I see nothing to indicate why Mr. Montgomery invested in MSFT in the first place. Dividend yield? There are other companies that pay out a higher percentage of earnings. Stock price appreciation? What company can grow at 30% forever? I too would like to see better performance in the form of dividends or share price appreciation. The value of the MSFT stock in my portfolio is headed in the opposite direction compared to the costs of my children's college education for which my investment in MSFT was intended to pay. But MSFT is not alone in this regard. So my advice to Mr. Montgomery is to vote with your brokerage account. If you don't like what MSFT is doing or where they are going, sell the stock. There are far too many whiny investors out there who believe that they have a right to extraordinary returns and that they should not have to bear the risk of any bad business decisions or losses.
Response to FK
Although we certainly understand and appreciate that everyone is entitled to their opinion, we fail to see the rationale in the comments by FK.
In the first few sentences you essentially complain about Microsoft. You reference companies paying out higher earnings. You refer to share appreciation. Then you indicate that you own shares and that the portfolio is heading in the opposite direction of your children's college education which MSFT shares were to pay for.
We have to agree that Microsoft is not alone in presenting a recent downward trend. However, if you examine other companies within the same sector, they have produced shareholder value. Microsoft, for a period of "eight years" have remained stagnant.
However, the most perplexing comment is stating selling shares at a loss. This fails to display any rational thought. If you acquired a meal at a restaurnat and were not satisfied, would you ask for a refund. If you acquired a product and were not satisfied with it, would you complain.
Management of companies have a duty to provide returns for shareholders. Shareholders are owners of the company. Microsoft for "eight years" have failed to create any true long-lasting value. Are you simply going to watch you children's college fund continue to evaporate?
Are you going to sell at a loss?
Shareholders have a right to hold management accountable for poor decisions. After Worldcom, Enron, Adelphia and other poor management decisions, shareholder activism has increased in popularity. It is not whiny investors, as you state, it is more holding management accountable.
America recently had its political election. Democracy demonstrates that the power belongs to the people. The President is at the mercy of the masses. If the masses are not happy, they exercise the vote and remove the President to be replaced by another potential candidate. The right to vote demonstrates the right to effect change. Failure to vote is failure to effect change. We are not referred to as whiny when we vote.
The marketplace is similar. Management is not a monarchy able to make decisions and effect loss in market share price without being accountable. Shareholders have the right to vote and effect change. If a President was threatening your children's college future with policy would you vote him or her out?
Or would you simply state, we have to accept decisions and there is nothing we can do?
Shareholder activism is demonstrating to management of companies that the power belongs with shareholders not the CEO or Board.
We state, use your shares to effect change and create value for the portfolio. You or any other shareholder should not have to sell at a loss.
Our full campaign can be located at http://thecrandreagoupr.blogspot.com
Ridiculous makes no sense
I am a regular reader of this blog and enjoy the articles and comments. But to the author of Ridiculous..you make no sense.
Seems people post comments that make no sense compared to the articles. You have to wonder if they even read it.
I must admit that I don't fully agree with Mr. Montgomery and the analysis. But, I am waiting for the other articles to better understand. The author of the blog says that we me not agree with the analysis but its worth understanding. This is only the first of a series. Your argument or comment fail to have any relevence to the article.
Mr. Montgomery or the article fail to make any reference to Server and Tools. So what are you talking about. There is no reference in the article in regards to eliminating Server and Tools.
You talk about the software industry being different from markets and people having no idea about the software industry.
If the blog is called Microsoft SubNet...who do you think is reading the articles?
Besides, the article based on my understanding is saying..other companies such as IBM, SAP, Oracle, HP, Red Hat have all created value. The article is saying that Microsoft since 1999 hasn't.
My advice to you is that which you stated to Mr. Montgomery..stick to what you know..which isn't much
Why did you buy in the first place
This is in response to the poster of Why did you buy...
I have to agree with Mr.Montgomery and this post. If you own shares in the company why would you continue to watch them lose value..
Mr. Montgomery is saying that other companies have created value for shareholders. It talks about HP, Apple and others since 2002 creating value..but Microsoft since 2002 have been in a narrow range.
As a shareholder I am not looking for a Google..and trading at $300 share. But as a shareholder that has watched the shares sit at the same level..I want to see the shares go up.
Mr.Montgomery is saying if other companies are creating value Microsoft should be able to also. The shares are trading at almost half I paid..if they keep going down I might have to sell at a loss. I don't want to loss more money. I want the company to start creating value.
I want to see what this activist is going to do. As a shareholder maybe you should to.
MSFT and R&D
Yawn, Montgomery should spend seven seconds reading the shareholder report and then he would realise the R&D budget includes the cost of coders for turning Research, through Development, into Product.
Want IPv6 - check the budget that paid for the work
Want "Ribbon" - well maybe not but it's in the product - check the budget that paid for the work to put it there
Want funky-new wireless support - check the budget it came from
and so on; this goes for any R->D->P
Want a software company that means anything in 2014, 2016, 2018; big-line budgets are needed to get R->D->P simple as that.
Sad part is this stuff is repeated and repeated by industry commentators that should both know better and do some investigation before they repeat each others claims ad-naeseum.
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