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August 21, 2006

Leveraged buyout musings for Microsoft

Posted by David Hunter at 7:20 PM ET.

Mitch Ratcliffe at his ZDNet blog:

I’m not sure what they are smoking at The Financial Times today, but it’s produced a hallucinogenic $288 billion in unrealized value that Microsoft is failing to deliver to investors. That is, value that would be extracted from the assets if the company were acquired in a leveraged buyout by private equity bankers who would leverage the company to the hilt, cut costs and staffing to the marrow and generally do violence to the lumbering giant.

The FT article by John Plender is titled “Private equity folk could do wonders with Microsoft” and is for subscribers only, but here’s a sample via Ratcliffe:

The new management could take the axe to Microsoft’s $6.6bn of wasteful research and development expenditure. The bloated workforce of more than 60,000 could be slashed, to the point where the huge resulting increase in cash flow would at last permit the company to borrow mega-billions.

This brings us to the real joy of private equity: the so-called “dividend re-cap”, a dividend-for-debt swap. The enhanced ability to borrow would permit the newly private company to make the greatest dividend payment of all time.

Ah, I hear you say, but what about the exit strategy? How, in the brutal jargon of the trade, could Microsoft be flipped? Simple. With such a humungous dividend recap, who cares about an exit strategy once the dividend is nestling comfortably in investors’ pockets?

Ratcliffe translates:

In other words, gut the company, take the money and run.

Click through for a thorough application of the clue bat by Ratcliffe, but you do have to wonder about an analyst who doesn’t realize that, as is common in the industry, Microsoft’s $6.6B in R&D is mostly development and comparatively little research. While there’s undoubtedly fat there, taking the axe to it means taking the axe to future product development. Of course, maybe that’s the plan. Talk about milking a cash cow!

Filed under Financial, General Business, Microsoft

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