Microsoft Wants To Buy Me Out

After spending the day at the PNE, we went to my parent’s place for dinner. Dad had some mail for me. I still have a few things that are mailed to my parents place instead mine and I’ve been too lazy to change them. Most of the mails were just junk stuff offering me credit cards and cash advance checks. However, two pieces of mail stood out. One of them was from Microsoft – it seems they want to buy me out!

No, Microsoft doesn’t want to buy my websites. Instead, Microsoft is doing a share buyback and it just so happen I own a block of Microsoft shares, and I’m sure all Microsoft shareholder received this offer. Basically Microsoft plans to buy 808,080,808 shares of its common stock at a price not greater than $24.75 nor less than $22.50. How MS came up with the 808,080,808 figure I have no idea. What is Microsoft going to do with the shares after it buys them? It plans to put them back in the treasury – I’ll explain how that works in a bit.

Buying back 808+ million shares is going to cost Microsoft about $20 billion. That’s a lot of cash. How are they going to get the money? According to their offering statement; “We anticipate that we will pay for the shares tendered in the Tender Offer, as well as paying related fees and expenses, from our cash and short-term investments.” Sure must be nice to have that kind of money sitting in the bank huh?

Now for all the new investors out there who are wondering what a treasury is and why a company would buy back its share, I’ll try to explain it. Basically, Microsoft has done the impossible. They have too much cash (I’m sure that is a situation we would all love to be in). This share back buy is part of a three prone strategy to increase the company value and rid the company of up to $75 billion in excess cash.

Buying back share increases the value of the company because share prices are directly affected by the number of shares out in the market (or shares outstanding for the correct financial term). Earning Per Share (EPS) is expressed by taking the company’s income and dividing it by the number of shares in the market. If you reduced the number of shares in the market by say 10%, then EPS will goes up 10%. If EPS goes up, so do share prices because EPS directly affect the Price Earning Ratio (P/E) used in determining share prices.

The repurchased shares will be place back in the company treasury. Treasury stocks are not used in the calculation of earnings per share because a company treasury can issue an unlimited number of shares (unless its charter prevents it). It’s kinda like the government printing money. If the government decides to increase the money supply by printing more money, they can do that but the value of their dollar will go down. If the government decides to tighten up the money supply (done by increasing the bank’s reserve requirements) the value of their dollar will increase. Well publicly traded company works the same way. If there was one share of MS outstanding it would cost $285 billion to buy it.

Another reason for MS to be doing a share buyback at this time is the company stock is undervalued and is a good buy. Look at it this way, the company can buy back its stocks now for $24.75. As long as share price don’t go below the offering price, the company is in the money. To tender your shares to MS, you send a letter to them telling how many shares you have to tender and how much you want for them, keeping in mind they won’t pay more than $24.75 per share.

After reading over the 26 page offer, I have decided to keep my Microsoft shares. The reasons for doing so would require a post in investment methodology to explain.

3 thoughts on “Microsoft Wants To Buy Me Out”

  1. smtkr says:

    This is mostly correct. The one bone I have is that decreasing the number of shares outstanding by x% will not result in an x% increase in EPS. It is not a direct relationship. For example, decreasing the number of shares oustanding by 10% results in an 11% increase in EPS. decreasing the number of shares by 20% makes something like 25% increase in EPS.

    Of course, when the share buyback is relatively small, they are mostly proportional.

  2. John Chow says:

    Ya, in this case the 808 million shares represent 7% of the company. I’m sure MS would like to buy back more at that would increase the tender price.

  3. perfectfire says:

    I, for one, would like to see a post on investment methodology.

    P.S. Love your blog. Can’t wait for the day I get the balls to stop trading hours for dollars.

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