Bierman, H XXXXXXXXXXCase studies for corporate finance: from A (Anheuser) to Z (Zyps) (Vol. 1). World Scientific.
CASE STUDY 2
Microsoft
Solving a Good Problem for a Company to Have (2004)
Strategic Overview
Microsoft announced at the annual
shareholders meeting in November 2002
that, despite having $40 billion in cash on its
alance sheet, the company would not be
taking any substantive measures to distribute
the cash to its roughly 4.2 billion
shareholders. Microsoft stated that the cash
was needed to satisfy judgments that could
arise from ongoing corporate and private
antitrust lawsuits.
While the company had a history of buying
ack its stock, Microsoft had never paid a
dividend since going public in 1986. The no
dividend policy made sense historically as
high-tech, growth companies with high
P/E’s, typically don’t issue dividends, but
instead elect to plow their profits back into
the business. But as of the shareholder
meeting, Microsoft’s growth had slowed to
about 10 percent annually, from 30 percent
or more in the company’s early years, and
the stock, as evidenced by its inclusion in
the Dow Jones Industrial Average, had
egun to look more like a stable blue chip
than a high-flying tech issue.
The announcement made at the 2002
meeting angered many shareholders. Growth
had stagnated and the company was sitting
on a pot of cash. It was an efficient business
that was generating $1 billion a month in
free cash. In a shrinking interest rate
environment, Microsoft’s returns on short
term investments were insignificant and
educed the firm’s return on equity. The
state of affairs led one investor at the
meeting to comment, “We need a reason to
hold the stock. We need a dividend. We
need something.”
Options
Management was under pressure to act.
They could choose between a myriad of
options including: 1) Doing nothing, 2)
Using the cash to finance acquisitions and
expansion, 3) Returning the cash to
shareholders by beefing-up the ongoing
stock repurchase program, a program that
had the company buying back shares at the
ate of up to $ 6 billion a quarter, or 4)
Returning cash to shareholders by issuing
dividends. Given the company had virtually
no debt (see below), share repurchase
appeared to be an efficient way to solve the
problem. Buybacks are tax efficient to
individual investors and protect shares from
dilution due to option exercise. Unlike
epurchases, investors assume that dividends
payments, once begun, will continue
indefinitely.
Decision
In mid-January of 2003, three months after
the November 2002 shareholder meeting,
the company surprised the investment
community by announcing its first-ever
annual cash dividend of 8 cents per share (2
cents per quarter). The dividend represented
Bierman, H XXXXXXXXXXCase studies for corporate finance: from A (Anheuser) to Z (Zyps) (Vol. 1). World Scientific.
a total outlay of more than $850 million
which translated into just over a quarter of 1
percent of the share price. While the
dividend made big news, it was met with
criticism that the dollar amount was
insignificant.
Following the announcement speculation
immediately arose over Microsoft’s change
in philosophy. One suggested reason for the
dividend was President Bush proposed tax
eform plan which would exempt
shareholders from income tax on dividends
(later changed to a 0.15 tax rate). Another
possible reason, and the one that Microsoft
stated publicly, is that many of the
company’s legal risks are largely behind
them. The company settled with the Justice
Department and many private antitrust
claimants and has made progress with the
European Union.
Shareholder Reaction and Company Update
Microsoft’s stock price dropped about $4 or
7% the day following the dividend
announcement. This was partially
attributable to the relatively weak outlook
for the cu
ent quarters, but the falling price
was likely an indication that some investors
concluded that Microsoft had exhausted its
growth options and the future looked
uncertain.
Despite the dividend payments and despite
continued stock buyback, Microsoft
continued to increase its cash balance. In
July of 2004, the company announced it
would issue a special cash dividend of $3
per share payable on December 2, 2004.
With almost 11 billion shares outstanding,
the special dividend would return almost
$33 billion in cash to shareholders. In July,
the company also announced that it would
egin to pay a regular quarterly dividend of
$0.08 per quarter. The move represented a
doubling of the dividend – the second time
the dividend had doubled since the initial
dividend issuance. But even with the latest
doubling, Microsoft’s yield will still be
elow the 1.7% average yield for the S&P
500.
Questions
1. Was the decision to start paying a cash dividend of $0.02 per share per quarter a good decision? Why or
why not?
2. Was the $3 per share special dividend desirable? Why or why not?
3. What were Bill Gates’ proceeds as part of the $3 per share special dividend? What did he do with those
proceeds? Did the size of his proceeds cause investor backlash? Should companies consider this when
choosing to pay dividends or special dividends? Why or why not?
4. What, if anything, should Microsoft have done with its $64 billion of cash and short-term investments?
5. Analyze and describe Microsoft’s dividend policy as it exists today. Do you agree with the firm’s
dividend policy? Why or why not? What, if anything, should Microsoft do differently with its extra cash
and why?
Case Study 2 Microsoft
Instructions:
1. Research the dividend dollar amount Bill Gates received in 2004 and what he did with his dividend payment.
2. Research what Microsoft's dividend payout is today.
3. Your submission needs to be at least 2 pages total including answering each question and your recommendation