Enough. Stop the madness. It’s time to call it a day.
Someone close to Bill Gates – someone he trusts, but also someone who can be objective (Warren???) – needs to have a heart to heart with him and make him see that his baby is grown up now. It’s time to let go. The alternative is to keep pissing money down rat holes: damned if you do, damned if you don’t.
I’ve been meaning to write this post for about a year now, just never had the time; I had planned to pull out the old spreadsheets and do some good old fashioned financial modeling (ie from the days I was an indentured analyst, not a coddled managing director) but I’ll probably never get around to that and yesterday’s announcement of Microsoft’s new investment in Facebook has prodded me to just get on with it (at the risk – please I encourage it – of some smart private equity number cruncher telling me my numbers are all wrong, and my trade doesn’t work.)
Now Facebook is an exciting opportunity, and I won’t pretend to know whether $15bn is too high (although I’m pretty sure it’s not a screaming bargain) but Microsoft’s problem isn’t that they have bought bad companies with bad technologies at bad prices. Mostly just the opposite. There are a lot of very smart people at Microsoft, starting at the top. They have bought many really interesting companies with really neat technologies and incredibly smart people. And then they kill them. They don’t mean to. But it is unavoidable. The corporate antibodies in a giant like Microsoft inevitably end up overwhelming the acquisitions (which especially given that by the nature of the industry, most are very young and very fast growing, innovation-driven companies that have not had time to evolve any defenses against mature mega-corporation antibodies. Don’t feel bad Bill, it’s not a Microsoft thing, it’s a Fortune 100 thing. The nature of your business (technology) just exposes you more is all.
Worse still – given that acquisitions are doomed to failure – is the glaring inability to (profitably) innovate in-house. Now to be fair, this again is not surprising. Microsoft is too big and worse – too rich – to have much chance of driving bottom-line boosting innovation from within. They face the traditional bugbear of big firms, which is no one ever got fired for not putting their neck out; no matter how smart and visionary the people at the top, the vast armies of the middle see (personal) risk, not opportunity, in change and innovation. And so (as rational economic beings) they resist. Usually passively, but given their sheer numbers, that is more than enough to suffocate even the most promising new products or services. Additionally, Microsoft has the problem of having too much money (burning a hole in their pockets…) and so even when they do come up with something interesting (say Xbox for example), they spend too much money and time building it which ultimately leads to financial failure accompanying these rare commercial successes. 
So what should be done? This is after all a $300bn company with tens of thousands of employees and hundreds of millions of customers. In my opinion, it’s pretty obvious: you take it private and restructure the hell out of it, give it an appropriate capital structure and in so doing release significant amounts of human and financial capital to redeploy in creating and growing the next generation of innovative technology companies. Microsoft is a quintessential fifth paradigm company, founded at the dawn of the information and telecommunications revolution ushered in by the microchip. It’s time to take the enormous wealth created by Bill and his colleagues and turn it towards the opportunities that will arise out of the sixth paradigm.
The current market cap is just under $300bn, I figure you’d need to pay a 20% premium to get a deal which in any event would be less about price and more about convincing Bill it was the right thing to do. So that would mean $360bn (or just €250mn or £175bn…) Sounds like a lot – especially in these post-credit-bubble-bursting times. But forget for a moment about the headline number and look at the underlying numbers (any help from a good MSFT analyst in correcting / debugging these back-of-the-envelope thoughts is welcomed!) In 2007, Microsoft had revenues of $51bn and an EBITD of c. $20bn. They have c. $30bn of cash/investments on their balance sheet and generated c. $18bn of free operating cash flow, another $5bn from investments, and spent $24bn buying back stock. They spend around $7bn a year in R&D (not sure what their depreciation policy is on this.) These are big numbers. Now, most of the bottom line comes from Windows and Office. Split these off and run them like the cash cows that they are: cut R&D, cut operating expenses – good old fashioned private equity pruning. Microsoft has no debt. How dumb is that?!? Give Windows/Office an efficient capital structure: you can probably even securitize a lot of their blue chip corporate licence revenues. In any event, you should be able to finance at least 6x EBITD. I don’t have the divisional breakdowns (the Annual report download from Microsoft’s site doesn’t work! I’m not making this up…maybe it only works with IE?!) but I wouldn’t be surprised if the lion’s share of FCF comes from these products. I figure – post restructuring – you should be able to get at least $22bn out of these alone, and so probably justify an enterprise value of $250mn+, with $125-140bn of debt (which could easily be serviced with the cash generated.) All of Microsoft’s other businesses would need to be sold (either back to their founders, trade sales or IPOs) or shut down. So are they worth $100bn or so? I don’t know. However it seems entirely plausible. Especially, unshackled from Microsoft, they would have much more chance of being successful.
So who could buy it? Who has c. $70-100bn of equity capital available (and the credibility to get the debt financing and spin-offs underwritten?) Clearly there are the usual suspects – the giant private equity players: Blackstone, KKR, Goldman Sachs, Silver Lake, TPG, etc. and the enormous sovereign wealth funds. (You want China to get serious about protecting software licences – give them a stake in Windows/Office…) And what about Cascade (Bill’s private investment management firm)? They might be interested (both financially and emotionally) in recycling $10 or $20bn of the proceeds back into the deal. (Not to mention all the other MSFT billionaires.) Also you have to think alot of the big institutional holders of MSFT would much rather hold a lean and efficient Windows/Office company and so might well be interested in recycling their payouts into a sidecar or 144a structure to participate in the deal. And then of course there is Warren. A lean, run-for-cash Windows/Office is a company that would be right down Berkshire Hathaway’s alley, no? Basically – and even if my maths/numbers above are a bit shaky, my gut feeling is that it would stack up. It’s fundable. And the banks will fall over themselves to get it done. Think of the fees!!! (In this instance, the ‘absolute’ numbers matter more than the ratios!)
So coming back to the start, the key is convincing Bill it is in the best interests of the company, his foundation (he can really focus), the employees, and the economy. It’s a win/win/win/win so to speak. And instead of punting a quarter of a billion dollars on a tiny stake in Facebook – you engineer a more robust and interesting trade like having Facebook buy MS Live (with stock) as part of the buyout. I don’t know, but I’m sure there are smarter things to do with their cash than the corporate equivalent of chasing rainbows (which seems to be the governing framework of Microsoft’s acquisition policy.)
If somebody does want to take a run at this, I hope they’ll think of giving me a small finders fee, and get me on the tombstone for bringing the idea. I wouldn’t expect alot. One basis point would be just fine. 
