Microsoft to Return $75 Billion to Shareholders

JEFFREY BROWN:

The announcement came after the markets closed last night, and as always with Microsoft, the numbers were very big. A one-time $32 billion dividend payout to investors– that's $3 for each share of Microsoft stock; a buyback of up to $30 billion of the company's stock over the next four years; and a doubling of the dividend the company pays annually.

It's said to be the largest cash disbursement in corporate history. And to help walk us through it, I'm joined by Esther Dyson, editor-at-large of CNET Networks and a long-time computer industry observer, and Tom Taulli, co-founder of Current Offerings, a technology and corporate finance research firm. Welcome to you both.

Starting with you, Mr. Taulli, for those who don't follow the world of corporate dividends and buybacks, tell us how this would work? How does a company give back so much money?

TOM TAULLI:

Each company has a board of directors and those board of directors make decisions, big decisions. One of those is whether to pay a dividend or not. And a dividend is paid in cash to all the shareholders, anyone who owns shares whether it be one share or, say in the case of Bill Gates, over a billion shares. Each shareholder gets that right to that cash. So what will happen is at the end of this year, sometime in December, you should get a check or it may roll into January, a check of $3 per share. So if you have 100 shares, you'll wind up with $300.

JEFFREY BROWN:

And what about a stock buyback, how does that work, Mr. Taulli?

TOM TAULLI:

The way the stock buyback works is that Microsoft has a lot of shares out there in the marketplace. And they want to boost the price of the share. The way to do that is to buy shares. That will stimulate demand for the stock. Now, that's usually done with other investors.

In this case, Microsoft itself will use its own cash, will call up brokers, institutional investors to buy those shares. Those shares come back into the company. The money goes back to people who sell their shares. So the money will leave Microsoft, but you'll have fewer shares out there and that should help boost the stock price a little bit.

JEFFREY BROWN:

Now, Esther Dyson, to do this, obviously the company needs a lot of money. Where is that money coming from?

ESTHER DYSON:

They basically have it already, but they're also continuing to earn a lot of money each year. The message they're giving is not the best news in the world, which would be they have a great new project to spend all this money on. But it's a good message because it says we're smart enough and we're humble enough that we are not going to waste your money. And they're continuing to do research. They're continuing to build new products and so forth, but they're not going to spend their money wildly. I think they've said we are no longer a start-up that doubles each year. We are realistic. We are selling to a very broad market and we're making a ton of money and we are going to give some of it back.

JEFFREY BROWN:

So do they do this under pressure to do something with the money, or is it a decision that their leaders make independently?

ESTHER DYSON:

Well, clearly people want them to do something with the money. They don't want them just to earn bank interest rates. And so they're smart, they're not going and buying a telephone company. They're not buying SAP, though they did consider that. They are saying look, we have projects to spend some of this on but the rest of it we are going to give back to you.

I think investors were wondering what they were going to do with that cash. It's a really good time now because of the specific tax situation. They have the money, and it seemed to be about time. They have resolved a lot of their legal problems. There's been a lot of cleaning up. And I think they're trying to become a much more institutional kind of sober dividend paying company. They're grown up.

JEFFREY BROWN:

Mr. Taulli, how do you see it? Why do you think Microsoft is doing this?

TOM TAULLI:

I think she hit it right on. This is a company that grew for a long time at a hyper growth rate. They led the industry, the software industry and the PC industry. To me it is as if an end of an era. They can't find enough places to put this money. They could waste it. They could buy a company. And that's typically the case of a lot of companies that have a lot of cash. The CEO wants to enhance their empire. They don't want to give that money back. The difference here is that you still have management with a lot of shares in the company. Bill Gates owns 10 percent of the company. The CEO, Steve Balmer, owns 5 percent.

So their interests are aligned with shareholders and they realize hey, why don't we just pay this money out; it belongs to the shareholders. I think there is a case where there is smart corporate decision making, don't waste the money. Give it back to those who deserve it and those are the shareholders.

JEFFREY BROWN:

They in essence have a problem that most of us will never face. They have too much money.

TOM TAULLI:

That's a great problem to have.

ESTHER DYSON:

God bless Bill Gates. God bless Bill Gates. He's going to spend it on something worthwhile. He is not buying another yacht. He doesn't need one. He will give most of it to charity over time. And I think that's a great model for other rich people to follow.

JEFFREY BROWN:

Well, let's look at where the money goes. We just talked about Mr. Gates. He gets more than $3 billion. And as you said, most of it, he said it will go to his foundation.

But, Mr. Taulli, where else does the money go to? How widespread are Microsoft shares?

TOM TAULLI:

Thirty percent are in the hands of individuals, people like you and I that work for a living and want to do things, maybe go on a trip, maybe even do some charity. But that money is doing absolutely nothing. It's just earning money; it's dead money. So this money goes out to those 30 percent individuals. They can then buy something. That stimulates the economy. There are also a lot of institutional shareholders that own this, such as mutual funds, for example.

A lot of Americans own mutual funds through their IRA's and their 401Ks. That will then benefit you for your retirement. That money goes back to you. So there are a lot of positive benefits to this. I think this is where a tax policy does work. Lowering the tax rates, encouraging companies to extract this money and put it back in the marketplace, because I think there is too much money being hoarded by corporations at this point.

JEFFREY BROWN:

Mr. Taulli, Microsoft's stock has been mind-boggling — mind-bogglingly good over the years. Can you give us any sense of how much a person would have made if they had bought early on?

TOM TAULLI:

Yeah, if you had the opportunity to buy early on, and usually you can buy what is known as the IPO, when they first go public, when they first become available for public shareholders. That happened in 1986. If you invested ten grand at that point, held on until today, it – you would be worth $2.8 million at this point on a $10,000 investment. Now even at the height, I think it was $7 million or $8 million when we went through the dot-com boom.

But also you had a lot of employees and employee stock options. There is a big debate regarding employee stock options who participated in that growth, not necessarily by buying the stock but by having the opportunity to accrue value through their employee stock options. So you have a lot of millionaires out there, some are secretaries that made a lot of money off Microsoft, especially if were you in early on.

JEFFREY BROWN:

Esther Dyson. Go ahead.

ESTHER DYSON:

The truth is, over the last five years, the stock hasn't done that much. You could argue it's real overvalued five years and now it has kind of caught up with reality and it is a solid company. But they're not at this pre-IPO bubble anymore and I think this is one way to help raise the value of the stock. But it's also an acknowledgment that they're a real company. They're not a hypey Silicon Valley, you know, you're seeing some of the IPO bubble in the valley again and Microsoft is differentiating itself from those guys.

JEFFREY BROWN:

Well, explain a little bit more what you mean by that, Ms. Dyson. Earlier you said this is a signal that Microsoft has grown up. I've heard the word today, a mature company. Is that as opposed to a kind of startup company that we were all familiar with?

ESTHER DYSON:

Yeah. To be candid, there is this sort of subtext we're not Google. Google is the other company that is getting a lot of attention for different reasons. And it's a subtle indication that yes, Microsoft feels threatened by Google. They're working on improving their search capabilities but they're also sending the message that we're mature. We are not fly by night. We are grown up. Wall Street understands us and trusts us. So it's really trying to join the ranks of the grown-ups.

JEFFREY BROWN:

Mr. Taulli, are there implications for the rest of the technology sector in this?

TOM TAULLI:

I think there are for the big companies, the Oracles of the world, the SAPs of the world. They're running into the same problems now. They're not as cash flow positive as say a Microsoft but they still have a tremendous amount of cash; they throw off a lot of cash and they're having a hard time finding opportunities for growth. Now Ellison at Oracle is engaging in hostile takeovers. It looks like he wants to buy companies. It looks like Microsoft wants to give the money back to its shareholders. I do think that this has big implications from the standpoint of it shows more than anything else that we are maturing in the industry.

JEFFREY BROWN:

Mr. Taulli, you said earlier this payout could impact and benefit the U.S. economy as a whole. How does that work? Is it that big to have that kind of an impact?

TOM TAULLI:

The Wall Street Journal compared this to a tax stimulus bill. It's almost equivalent to what would you see from Capitol Hill, what Congress would do to pass a tax stimulus bill. So I do think it will have an impact on the economy. It could even have a broader impact when some of the other companies may look at Microsoft as an example and say to themselves, maybe we should start sending some of our money to our shareholders and there may be more pressure on companies like Pfizer and Exxon to start paying higher dividends and maybe have a one-time distribution.

JEFFREY BROWN:

And, Ms. Dyson, what do you think about the impact on the economy?

ESTHER DYSON:

I think it's really interesting. If you want to get sort of conceptual, you could almost say in a sense that the Internet or the computer using community pays a tax to Microsoft every year because they buy its operating systems and a lot of their infrastructure comes from Microsoft. And now yeah, we're getting a tax cut or a tax refund. And it's being spread to something of a different community, but it is of an amount, $9 billion to individuals and $30 billion to the economy overall, that really matters in terms of goosing spending and goosing people's feeling of not being under total pressure so they'll go out and buy something.

JEFFREY BROWN:

And, briefly Ms. Dyson, is there any implications for all us as consumers in Microsoft's action?

ESTHER DYSON:

Well, as consumers that … the market is pretty competitive right now, and … basically it's good news because there's more money in the economy and, I don't know. I wouldn't say it has a direct impact on consumers other than as citizens of a country and an economy that is having some more money pumped into it instead of the money sitting around in a bank account or maybe some kind of bonds.

JEFFREY BROWN:

Okay. Esther Dyson and Tom Taulli, thank you both very much.