MSFT - Microsoft

[Palantir]

Shareholders own "firm", which is a separate entity, and the "firm" owns assets. That doesn't mean the property is transitive.

 

 

[oddballstocks]

I think you're confused on this.  In the US, where Microsoft is created to form a corporation you need shareholders.  The shareholders own the corporation, a legal entity.  In the US a corporation is considered a person, a natural person can have hold to assets, and a legal person (corporation) can own assets as well.

 

A corporation cannot exist without shareholders.  I own an S-corp, I am the sole shareholder, but there has to be at least one shareholder, I can sell shares to others, but to form I had to have at least one shareholder.  I am not the S-corp, it's independent of myself, it can own and owe things separate from myself.  But being the sole shareholder I completely control those assets/liabilities, if I decided to dissolve the assets would all flow to me.

 

If Microsoft were to liquidate shareholders would receive the foreign cash minus any applicable taxes.  I've been involved in liquidations, there are no assets stranded because they're in a different country, to dissolve a corporation all assets need to be distributed to shareholders.  You can't file to dissolve without emptying the company.

[Palantir]

I think you're confused on this.  In the US, where Microsoft is created to form a corporation you need shareholders.  The shareholders own the corporation, a legal entity.  In the US a corporation is considered a person, a natural person can have hold to assets, and a legal person (corporation) can own assets as well.

 

A corporation cannot exist without shareholders.  I own an S-corp, I am the sole shareholder, but there has to be at least one shareholder, I can sell shares to others, but to form I had to have at least one shareholder.  I am not the S-corp, it's independent of myself, it can own and owe things separate from myself.  But being the sole shareholder I completely control those assets/liabilities, if I decided to dissolve the assets would all flow to me.

 

If Microsoft were to liquidate shareholders would receive the foreign cash minus any applicable taxes.  I've been involved in liquidations, there are no assets stranded because they're in a different country, to dissolve a corporation all assets need to be distributed to shareholders.  You can't file to dissolve without emptying the company.

 

Yes, I'm aware, MS as a corporation is a separate person from the shareholders. And while shareowners are necessary for a corporation to exist, that does not mean they are one and the same.

 

Your scenarios are dependent on "dissolving" a company, when you're dissolving the firm, the assets are being separated out of the firm as an entity, and since you're a prorata owner of the firm, you're getting those assets. Just like in a spinoff, being an owner in the parent, you get a pro-rata stake in the child.

 

However, in a going concern, that doesn't mean you own a prorata stake in the assets, there is a clear layer between the two.

 

EDIT: I need to pause my participation here....this is using up a lot of time.

[bmichaud]

Shareholders own "firm", which is a separate entity, and the "firm" owns assets. That doesn't mean the property is transitive.

 

What is the point of owning "firm" if you can't own what "firm" owns? You have to own something. You're making the ludicrous argument BAC tried to make in its case against MBIA - even though it purchased Countrywide, because CW was a "separate legal entity" it wasn't really truly liable for CW's debts....BUT it somehow magically "owned" the assets that it transferred to itself.

[txlaw]

Well, this is very interesting. 

 

Given what just occurred, I think it's likely that Ballmer did not get fired.  Instead, he appears to have bitten the bullet by resigning earlier than he wanted and giving ValueAct board seats in order to lessen any ammunition they might use (or gather) to torpedo the NOK deal.  Good for Ballmer -- he has always tried to do what's good for MSFT, and has been made a scapegoat by the media and by activist investors like Einhorn.

 

Yeah, right. What happened to your theory that they were going to by RIM? Maybe they'll buy QNX for billions  ::)

 

You're mistaken.  I never had a theory that MSFT would buy BBRY.  Here's what I said verbatim:

 

MSFT -- A lot of people have suggested MSFT in the past.  I don't believe this makes much sense, though.  MSFT is committed to Windows and its other solutions (included its own embedded systems option), and I don't think it's possible at all to fold in BBRY's core OS technology into Windows.  Having said that, there could be some incentive for MSFT to do a deal in order to take advantage of the security advantages that BBRY has over the competition.

 

It's too bad you always try to misrepresent what people say, ValueInv.  Sometimes you have some interesting observations, but the noise to value ratio is high with your posts.

 

Go back some months in your posts.

 

BTW, I am still waiting for any signal in your posts.

 

You're just making things up.  Feel free to link to some actual posts where I said that MSFT would be buying BBRY.  You're not going to find them.

 

I did say this at one point:

 

The way that BBRY could align itself with MSFT would be to tie BB10 to Bing search, Bing maps, Office, Skype interoperability with BBM, Sharepoint, Skydrive, etc.

 

Not saying that they will do this but that this is a possibility that their strategic advisors have likely pointed out to them.

[Palantir]

 

What is the point of owning "firm" if you can't own what "firm" owns? You have to own something. You're making the ludicrous argument BAC tried to make in its case against MBIA - even though it purchased Countrywide, because CW was a "separate legal entity" it wasn't really truly liable for CW's debts....BUT it somehow magically "owned" the assets that it transferred to itself.

 

Yes, that's exactly what I'm saying. You are a part owner of the firm, but not of the assets that the firm owns, unless the firm separates the assets via something like a dividend, spinoff etc.

[txlaw]

Here's my take on MSFT's decision to buy NOK.  (If you're gonna respond in disagreement, please try to be civil.  This could be a very interesting conversation/debate, and it would be nice to engage in it without a bunch of insults flying around.)

 

------------

 

Microsoft made approximately $9.5 billion last year in its Windows division, so it's still a cash cow.  However, the franchise is in danger of going down the tubes and becoming a cigar butt business due to disruptive technologies and disruptive business models. 

 

Commoditization of the OS is the big problem here.  You have guys who are providing "good enough" alternatives to Windows (iOS/OSX, Android, ChromeOS, Ubuntu, etc.), and they're changing the business model associated with providing an OS, which has traditionally been to license the software or sell a license embedded in a hardware product (like Apple does).

 

So MSFT is engaging in a "transformation."  MSFT is trying to maximize the value of the OS licensing business, which will eventually be a minimal percentage of their income, by vertically integrating in some respects, thereby becoming a "device company."  (Note that they cannot completely abandon their OEM frienemies in the tablet and desktop/laptop market because then they would lose a lot of licensing fees.)  And MSFT is also transitioning from an OS licensing business model to one where they will provide valuable software and services that are tied to Windows (and that can be run on other OS's as well). 

 

Any success in this transformation is contingent upon MSFT retaining as much market share as they can for Windows in the face of the onslaught by the barbarian hordes.

 

That's where NOK comes in.  Windows market share could decline quite rapidly if MSFT is unable to generate some success in the mobile phone space.  In fact, if MSFT crashes and burns completely with mobile phones and remains a niche provider (like, say, a BBRY), then the decline of Windows across the board will accelerate.  Since NOK is the only company actually selling Windows phones, MSFT has decided to take them in-house in order to accelerate market share gain for Windows phone, which will help them maximize the value of the Windows franchise.

 

So from a strategic perspective, this acquisition makes a lot of sense.  The issue is whether the price they paid was too high.

 

Unfortunately, figuring out whether the price paid for NOK is too expensive is almost impossible for an OPMI because the decision is almost certainly based on internal projections regarding counterfactual scenarios.  The question is what the life of the OS licensing business model would be, and what the market share loss would be for their tied software and services, in the absence of a NOK acquisition. 

 

For example, let's present a hypothetical situation where the NOK acquisition allows MSFT to increase their mobile phone market share to 15% of the market.  This, in turn, helps to extend the life of Windows licensing for, say, two years more than if MSFT share remains where it is.  If the two extra years of licensing fees amounts to more than $7.5 billion of profit, then the NOK acquisition would have paid for itself. 

 

But it's impossible for us, as outside investors, to determine what type of calculations the guys made before making their bid.  If you trust management, you should be comforted that they likely paid a rational price.  If you don't trust management, then you will probably take the position that they, more likely than not, paid too high a price.

[Palantir]

My concern is that smartphones and tablets are a mature market (could be wrong), so I worry he's trying to fight yesterday's war. That being said, there can be growth in mature industries too, and there are emerging countries coming online. I think the price they paid is fine, it was offshore cash, which has a 30% hit if brought back, and they're only purchasing the devices business, not the whole of Nokia. Given that WP8 is growing, I think it will not be that expensive in retrospect.

 

I tend to see MS as a platforms and enterprise services company, and I think that's what they should focus on rather than "devices and services". On the consumer side, I would like them to focus on building out Xbox to become the software platform that it can be, and disrupt the TV biz, perhaps they can even license the OS out to OEMs.

[rpadebet]

Does anyone know if NOK's devices division had any unused NOL's? If so and if they are transferred to MSFT as part of the deal, then the actual cash price paid for this acquisition could be still lower.

[txlaw]

https://www.microsoft.com/en-us/news/download/press/2013/StrategicRationale.pdf

[txlaw]

https://www.microsoft.com/en-us/news/download/press/2013/StrategicRationale.pdf

 

This presentation is great.  It should make some of you guys who are shareholders more comfortable with the strategic rationale behind this acquisition.

 

I don't own any MSFT right now, but I will be giving this one some deep thought.

[txlaw]

The transcript is up too:

http://view.officeapps.live.com/op/view.aspx?src=http://www.microsoft.com/investor/downloads/events/Microsoft_Nokia_Transaction.docx

[Myth465]

Show me more than 1 acquisition of scale that Microsoft has made work?

I can name 5 of which sucked. The most recent being Skype...

[DTEJD1997]

Show me more than 1 acquisition of scale that Microsoft has made work?

I can name 5 of which sucked. The most recent being Skype...

 

There are MANY acquisitions that MS made that were tremendously profitable.

 

Unfortunately, most of them were back in the 80's and the early 90's.

 

MS has a DISMAL record of acquisitions the last 15 years or so.

[alertmeipp]

https://www.microsoft.com/en-us/news/download/press/2013/StrategicRationale.pdf

 

This presentation is great.  It should make some of you guys who are shareholders more comfortable with the strategic rationale behind this acquisition.

 

I don't own any MSFT right now, but I will be giving this one some deep thought.

 

The https link does not work for me.

 

http://www.microsoft.com/en-us/news/download/press/2013/StrategicRationale.pdf

 

[Palantir]

I don't think Skype sucks. People use it a lot. And we knew going in that it was not going to be motivated by profit but rather adding a new product/service....yeah they overpaid, but that was offshore cash which may as well be haircut for 30%.

 

 

[Viking]

Michael Mace's initial thoughts on the deal: http://mobileopportunity.blogspot.ca/2013/09/microsoft-nokia-now-were-all-like-apple.html

 

Lot's of questions and few answers: http://www.appleoutsider.com/2013/09/02/nokia2/

 

Either MSFT leadership team are crazy smart like a fox or they are in deep shit. I don't think they are crazy smart like a fox.

[Myth465]

Interestingly enough I think its a good move and the right move but I dont trust MSFT to execute. They have shown they cant build competitive products (Zune, Surface) from a hardware prospective.

 

I am not sure how this fixes that.

If you think paying 8 billion for Skype when you get all of Nokia for 7 was a good move then I have plenty of things to sale you. I would prefer to pay the taxes and give me the cash. There are worse things in the world then paying 30 percent in taxes, buying 100% of Skype and watching that money disappear is one of them.

[DTEJD1997]

Hey all:

 

I just thought of idea why MS might have bought Nokia...

 

Maybe they HAD to buy them...

 

What if Nokia threatened that they were going to stop building Windows phones?

 

Could you imagine the bad press for MS?  Does anybody ELSE build Windows phones?  I had to go to the Google and was surprised that Nokia only built 83% of Windows phones.  I would have thought that number would have been higher.

 

Evidently HTC has a Windows phone model.

 

Windows phones are close to 2% of the smartphone market.  I had no idea it was this high!

 

So maybe Nokia threatened MS, and they had to get bought out. 

[alertmeipp]

anyone think skype and nokia will have some synergy?

[petec]

That presentation makes a lot of sense to me and suggests they have actually thought about what they have paid.  I agree that the issue will be execution. 

[Palantir]

All I have to say is, this company just got a lot more complicated to run. This is why an outsider CEO is not a good option, they need an insider. They are in:

 

-hardware

-operating systems

-cloud (PaaS, IaaS)

-search

-enterprise services

-videogames

-productivitiy applications

 

I firmly believe there are strong synergies between all of them, and putting them under one house can be a good idea. But, the problem is execution. I don't know who is qualified to run this behemoth.

[Palantir]

I am not sure how this fixes that.

If you think paying 8 billion for Skype when you get all of Nokia for 7 was a good move then I have plenty of things to sale you. I would prefer to pay the taxes and give me the cash. There are worse things in the world then paying 30 percent in taxes, buying 100% of Skype and watching that money disappear is one of them.

 

I don't agree, I think Skype was a pretty reasonable acquisition, they probably did overpay but if it works out, then no one will mind. I'd rather add a great product/service to the firm rather than get a one time 2% special dividend.

 

[txlaw]

Yes, execution will be key, and I think it's fair to say that that has been lacking at MSFT lately compared to some of their competitors.  But I guess that's why they're doing the reorg and bringing in new blood.

 

I hadn't seen the presentation and transcript before I made my first long post.  I find Slide 22 very interesting. 

 

MSFT is setting a 15% market share target (like my hypothetical) in five years, which they believe will result in annual revenue of approximately $45 billion.  This means they're expecting (or conservatively projecting) an ASP of approximately $176 for each WinPhone.  Compare that to AAPL's current ASP of $581, which would have to be reduced a substantial percentage on an annual basis to reach the same number.  And even under a 5% operating margin scenario (very low compared to, say, an AAPL), they figure the NPV of the deal just for the phone sale business itself -- never mind the protection of Windows -- is more than the purchase price.

 

If you consider Skype as part of the devices acquisition -- so take a combined purchase price of $5 billion for NOK devices + $8.5 billion for Skype -- because having a FaceTime/Google Hangout/BBM equivalent is necessary for any serious OS provider, then that still works out to the deals paying for themselves.  Not even taking into consideration the protection of perhaps the greatest businesses the world has ever seen -- Windows. 

 

(Having said the above, I don't understand the price paid for Skype, although I do understand the strategic rationale for the acquisition.)

 

If MSFT can execute, then this is a fantastic deal. 

[Palantir]

I just thought of idea why MS might have bought Nokia...

 

Maybe they HAD to buy them...

 

What if Nokia threatened that they were going to stop building Windows phones?

 

Yes, I think this is the case too. I think Nokia could well be a steal if it works out. Their windows phone business is growing nicely, and I'd like to see them try to make a profit on the handsets rather than a loss leader for services.