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Wednesday, July 21, 2004 - Page updated at 07:22 A.M.
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Microsoft's $75 billion plan: share wealth with investors

By Brier Dudley
Seattle Times technology reporter

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In a stunning move that could reignite Microsoft's stock and boost the Puget Sound economy, Microsoft will spend up to $75 billion paying bigger dividends and buying back some of its stock over the next four years.

Whether the moves will have a long-term effect on the company's stock price remains to be seen. Either way, the payout — perhaps the largest ever in corporate America — reminds investors that Microsoft is a phenomenal moneymaking machine.

Wall Street had expected the company to announce plans for its cash pile sometime before July 29, the day of its annual financial-analyst meeting in Redmond. The plan was abruptly announced yesterday after the stock market closed and just before the company's fourth-quarter earnings report tomorrow.

Investors pushed the stock up 5 percent to $29.81 in late trading yesterday. The stock has hovered between $25 and $30 over most of the past two years.

Up to $30 billion will be spent buying back stock, $32 billion will be distributed as a one-time, $3-per-share payout, and $14 billion will be used to double the regular dividend, from 16 cents a year to 8 cents a quarter.

Company executives said they are no longer as concerned about legal challenges, having resolved most of their antitrust cases, and feel comfortable enough in the business' growth to release the cash. As of March, the company had $56 billion in cash on hand, and it is netting about $1 billion a month.

"I'm confident we have some of the greatest dollar-growth prospects ahead of us of any company in the world, full stop, period," Chief Executive Steve Ballmer said.

How the money will flow


Microsoft yesterday said it will spend up to $75 billion to buy back stock and pay dividends. Here's the breakdown, in round numbers.

$30 billion: Up to $30 billion will be spent buying back stock over the next four years to increase the value of investors' shares.

$32 billion: A one-time, $3-per-share dividend, payable Dec. 2, will cost the company $32 billion.

$14 billion: The company raised its dividend to 8 cents a quarter; that will cost it $3.5 billion a year.

Executives emphasized in a conference call that Microsoft will continue to invest heavily in research and development, and will have plenty of cash left to make strategic investments.

"You might say what's next for us, and the answer is record investment in innovation," said Chairman Bill Gates, who called yesterday's announcement "a pretty exciting milestone."

Ballmer said the payout plan will make Microsoft the No. 1 U.S. company in terms of returning cash to shareholders over the next four years.

Microsoft is still growing, but at a slower rate.

"Starting to lose patience"

A moribund stock price led investors to start pressuring the company several years ago to distribute more of its cash, and analysts had widely predicted a large buyback and a larger dividend. A buyback reduces the number of shares outstanding, and may increase the value of shares remaining in investors' hands.

Last month, Goldman Sachs analyst Rick Sherlund in New York suggested the company buy back $40 billion of its stock, and predicted the company would make a special announcement before tomorrow's earnings report.

"This is excess cash," Sherlund said yesterday. "Microsoft doesn't need this cash to be competitive in the market, to fund development — development is already funded out of the cash flow of the business."

After the $75 billion is paid out in 2008, Microsoft should be left with more than $20 billion in the bank if its business performance continues.

"I was starting to lose patience with all that cash sitting there," said Brian Eisenbarth, senior portfolio manager at Davidson Investment Advisors in Great Falls, Mont., who manages a fund with around 250,000 Microsoft shares.

Eisenbarth said the approach is not as dramatic as it sounds, given the company's cash flow.

"Over the next four years, another $50 billion is going to pour in, so they're not really putting a big dent, over time, into cash."

Microsoft's plan "will reinvigorate investor interest," said Brad Reback, an analyst with CIBC World Markets in Atlanta.

"Investors will take this as a signal that management is very focused on making sure investors get a healthy return from the stock through a combination of growth, dividend and repurchase," he said. "I think that will be well received."

The one-time payout of $3 per share could be a windfall for the Seattle area, which has the largest concentration of individual Microsoft shareholders.

"That is a large amount of money that will be coming into the Seattle region," said Don Gher, managing director of Coldstream Capital Management in Bellevue. Both Gher and Coldstream hold Microsoft stock.

"Personally, I'm looking at this as a nice little Christmas present," he said.

The payout and higher dividend could prompt current and former employees to exercise more of the roughly 1 billion stock options they are holding.

Microsoft stopped issuing new options last year, but many employees still hold them and are waiting for the situation to improve before they use their options to buy shares of stock.

Instead of options, Microsoft now uses outright stock awards to compensate employees. Gher said the payout plan "kind of supercharges" those stock awards.

Gates to donate dividend

The largest beneficiary will be Gates, who holds about 11 percent of the shares.

He announced yesterday that he'll give the $3 billion he gets from the one-time dividend to the Bill & Melinda Gates Foundation for charity.

"The pledge today is recognition that our world, the nation and our region — now more than ever — can and should dramatically improve equity in health, education, and access to information and human services for vulnerable families," Gates said in a statement.

For other employees, the company is making adjustments to the stock-option and stock-award programs to be sure they aren't hurt by the $3 special payout. In theory, because the stock reflects the value of the company, the payout will reduce the value of the stock by $3. So Microsoft will adjust the value of stock awards and outstanding employee options to maintain their value.

For example, if the stock is at $30 when the payout is made, the value of an employee's restricted stock award will be increased 10 percent — or $3 — to compensate for the change. Ballmer said the adjustments are being made "to ensure our employees will not be unfairly disadvantaged."

The $3 payout is contingent on shareholders approving the stock-plan adjustments at the company's annual meeting Nov. 9.

For investors, the quarterly dividend will be payable Sept. 14 to shareholders of record on Aug. 25. The special $3 dividend will be payable Dec. 2 to shareholders of record on Nov. 17.

The announcement came after Microsoft's board meeting, where the plan was unanimously approved. Board members were presented with several scenarios prepared by a group that included Microsoft's finance, treasury, investor relations, public relations, human relations and legal departments, Chief Financial Officer John Connors said.

Among the other options were plans that had bigger payouts and others with bigger stock buybacks. Some had different levels of regular dividend. "This one really emerged as the best," he said.

There's no perfect answer for what to do with all the cash, Connors said, but the plan announced yesterday has "something for everybody."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Copyright © 2004 The Seattle Times Company

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