Best of the Week
Most Popular
1.US Dollar Crashes, Gold And Bitcoin Skyrocket As Economic Recovery Lie Is Exposed - Jeff_Berwick
2.Now Obama Warns Americans to ‘Be Prepared’ for Disaster… What Does He Know? - Jeff_Berwick
3.EU Referendum - Britain's Immigration / Migrant Crisis Explained - Nadeem_Walayat
4.EU Referendum - British People vs Establishment Elite, Vote LEAVE an Act of Defiance! - Nadeem_Walayat
5.Prominent Billionaire Investors Warn of Financial Crash, Quietly Position Themselves - MoneyMetals
6.Bankers Warn of BrExit Financial Armageddon if British People Vote for Freedom - Nadeem_Walayat
7.Bad U.S. Jobs Report Prompts Stocks Bear Market Rally Towards New All Time Highs! - Nadeem_Walayat
8.Gold And Silver – Friday May Have Marked A Pivotal Turnaround - Michael_Noonan
9.EU Referendum - British People vs Establishment Elite, the Illusion of Democracy and Freedom - Nadeem_Walayat
10.Felix Zulauf: Monetary Stimulation Creates Bubbles, Not Prosperity Nor Growth - GoldandLiberty
Free Silver
Last 7 days
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16
Final Opinion Poll Gives REMAIN 52% Lead, Bookmakers, Markets and Pollsters ALL Back REMAIN Win - 23rd June 16
Does BREXIT Matter? Outlook for Sterling - 23rd June 16
Keep Calm and Vote BrExit - Last Chance to Break Free of EU Superstate - 23rd June 16
Here’s the Foreign Policy Trump and Clinton Really Want - 23rd June 16
Details Behind Semiconductor Stocks Leadership - 23rd June 16
Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - 23rd June 16
BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - 22nd June 16
Proof that the Gold Bears are Wrong - 22nd June 16
Here’s a Trillion-Dollar Investment Opportunity for Those Few with No Debt - 22nd June 16
BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - 22nd June 16
Increase In U.S. Rig Count Will Not Cap Oil Prices - 22nd June 16
Are Copper and China Stocks Set to Rally? - 22nd June 16
SPX May Break Its Trendline - 22nd June 16
Believe it or Not: More Kids Live At Home Now than Since The Great Depression - 21st June 16
EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - 21st June 16
British Pound Outlook - BREXIT, Europe and You - Does your vote matter? - 21st June 16
Fascist Victory Behind the European Union - 21st June 16
EU Referendum Opinion Polls Analysis Shows Strong Momentum in REMAINs Favour - 21st June 16
Is It Time to Dump Gold and Buy Platinum? - 21st June 16
Could Central Bankers Be Gold and Silver's BIGGEST Allies? - 20th June 16
Words Still Mean Things – Brexit With Graham Mehl - 20th June 16
Baroness Warsi the Manchurian Candidate Quits LEAVE for REMAIN, Boris Johnson Next? - 20th June 16
FTSE Soars, Stock Markets Bounce on LEAVE Polls Surge, Bookmakers Widen BrExit Odds - 20th June 16
Brexit Would Trigger Devolution of Europe - 20th June 16
Stock Market Week Of Uncertainty - 20th June 16
Will Gold’s Bullish Price Chart Outperform Gold’s 5 Bearish Indicators? - 20th June 16
Bonds And Stocks At All-Time Highs: Are Markets Confused Or Broken? - 20th June 16
Silver Sleeping On the Job - 19th June 16
BrExit Odds Sink, REMAIN Polls Boost by Jo Cox Killing by Radical Right Extremist, Conspiracy? - 19th June 16
How Elliott Waves Tell You When to "Jump In" & When to "Jump Out" of Markets - 18th June 16
Stock Market Inflection Point During Bifurcation - 18th June 16
Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - 18th June 16
Gold Stocks - Bull Markets that Follow Epic Bears - 18th June 16
The Fed Giveth and the Gold Bullion Banks Taketh Away… - 17th June 16
Brexit: "The Vote Heard Around the World" - 17th June 16
Gold Stocks Summer Breakout? - 17th June 16
Stock Investors Get Higher Returns and More Dividend Income - In Less Time With Less Risk - 17th June 16
How to Use the Gold-to-Silver Ratio? - 17th June 16
Inflation, Deflation & Associated Trading Prospects - 17th June 16
Overnight Markets Struggling to Stay Flat - 17th June 16
Gold Price Surges to Highest in Nearly Two Years On Central Bank and Brexit Haven Demand - 17th June 16
Stock Market Thinking Upside Down; Dow 18k Still Key - 17th June 16
Jo Cox MP Terror Attack Killing Claimed for "Britain First" - Witness Report - 17th June 16
Stock Market, Iron Ore, Bitcoin – Is Silver Next for Chinese Momentum Investors? - 16th June 16
EU Referendum Campaigning Suspended Following Shooting of MP Jo Cox, Suspect Named as Tommy Mair - 16th June 16
Why People are Migrating to the UK, Illegal Immigration, Housing Crisis Consequences - 16th June 16
Stocks Fluctuate Following Recent Decline - Bottom Or Just Pause Before Another Leg Down? - 16th June 16
The US Consumer-Driven Economy Has Hit a Brick Wall - 16th June 16
Bitcoin Price Going Parabolic Again, Now At $730 and Up 60%+ In Last Three Weeks - 16th June 16
China's Hard Landing Has Already Begun! - 16th June 16
Crude Oil Price - Oil Bears vs. Support Zone - 16th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

Nokia Deal Could Mark the Last Chapter for Microsoft

Companies / Microsoft Sep 06, 2013 - 12:37 PM GMT

By: Vitaliy_Katsenelson

Companies

As a value investor I used to spend a great deal of time in Microsoft hell – on one hand there was the company with enormous cash flows, an incredible return on capital, a huge moat, a cash-rich balance sheet, and trading at single-digit multiples (if you adjust for cash).  But on the other hand it threw away cash away for multi-billion-dollar acquisitions, followed up by inevitable write-offs.  Its founder and chairman was not interested in running the company, so he delegated to his best friend, who has been wrong at every single technological inflection point, and quite frankly not a very good leader.  Every few years the company airbrushes its old products (think of Office), calls it an upgrade, and goes on charging subscription fees; but new products quite frankly … suck.  Microsoft's competitors are getting better, and while a strong balance sheet helps in bad times, it is not a competitive advantage against competitors that have even more cash.


I was stuck in the middle– Microsoft was too cheap, but if it kept doing what it was doing it would become a declining annuity, at best.  Finally last year, after I previewed Windows 8, we sold the stock and bought Oracle – it has all the aforementioned positive Microsoft’s qualities (competitive advantage, recurrence of revenues, balance sheet, etc…) with one significant bonus: it is run by Larry Ellison.

Larry owns a third of the company.  He is the third-richest person in the world.  Normally this would not matter, but Larry is extremely competitive and he wants to be the richest person in the world.  The only way for him to get there is by increasing the value of Oracle.  With Larry running the company I don’t have to worry about dumb acquisitions, dilutive stock options, or share repurchases that will destroy value.  Oracle is facing competition, but Larry is very aware of it and has been fighting different competitors for decades.  Larry is on every earnings conference call.  (By the way, if you have never listened in on Oracle’s conference calls, I highly recommend it – very entertaining).  Finally, Oracle's valuation is similar to Microsoft’s. 

Back to Microsoft.  By the time I finished writing the following article I had achieved this clarity: unless a new outside CEO is brough in to fix the Microsoft culture, Microsoft as a stock is dead to me.

One more thing: Samsung introduced their watch on Wednesday. I think that is great news for Apple shareholders.  The watch looks like it came straight out a 1990s Timex catalog; they have set the bar for Apple’s watch very low. 

Nokia Deal Could Mark the Last  Chapter for Microsoft

http://www.institutionalinvestor.com/blogarticle/3251607/Nokia-Deal-Marks-a-New-Chapter-for-Microsoft.html

On Monday night I sat down to put my thoughts to paper. I was going to pontificate on CEO Steve Ballmer’s departure from Microsoft, saying something along the lines of “With Steve Ballmer gone, at least Microsoft’s capital allocation will be better — no more multibillion-dollar acquisitions and consequent write-offs.” I opened my Chrome browser (I gave up using Internet Explorer a long time ago), and the first piece of news I saw: Microsoft had just paid $7.2 billion for Nokia’s handset business.

Before I get into the Nokia acquisition, let me talk about the two Microsofts: the Bill Gates Microsoft that died in 2000 when Gates retired as CEO, and the Microsoft that was born when Steve Ballmer took over.

Bill Gates built an enormous, one-of-a-kind company with insurmountable competitive advantages. It was not great at innovation but was terrific at copying; it would take a product made by someone else and make it much better. WordPerfect, Lotus 1-2-3, Novel, Lotus Notes, Borland Paradox — all these products and the companies that made them were replicated out of existence by Bill Gates’s Microsoft.

Bill’s Microsoft was not perfect. It almost slept through the Internet revolution, but when it woke up it marched on with a vengeance and reclaimed its relevancy.

Bill Gates retired as CEO in 2000. Although he remained chairman, his focus was on how to give away rather than make money. Steve Ballmer, his former Harvard University dorm mate and fateful No. 2, became CEO. The irony of Ballmer’s Microsoft is that although revenues and earnings have almost tripled since he became CEO — not a sign of a failing leadership or mismanaged company — Microsoft nevertheless became less relevant, missed significant technological transitions, and lost its market dominance in mobile to Apple and Google. It allowed Apple to take over the tablet market; and despite spending over $10 billion on search, its market share in search pales in comparison to Google’s. Yes, the company’s financials look impressive, but they were delivered on autopilot by the Microsoft created by Bill Gates. Microsoft is an air carrier that gained speed in the ’80s and the ’90s, and has been coasting on momentum (inertia) ever since. But momentum is finite, and there are always storms en route.

Blaming Steve Ballmer is easy — after all, he was in charge — but Microsoft’s problems are programmed into its very DNA: Prolonged success begets failure. The more successful you become, the more entitled you feel to success. Bureaucracy gradually slips in, layers of middle management grow, your culture starts to degrade, and you simply become too big to be innovative (or in Microsoft’s case, replicative). You wake up one day and discover that you have 100,000 people working for the company and too many of them are in middle management. Ballmer’s failure is not missing technological transitions; Microsoft missed them in the past and was able to catch up. His failure is his inability to deprogram that DNA fault.

Microsoft’s culture was further degraded by a compensation system that resembles a corporate version of the Hunger Games. Instead of being compensated based on their skills, contribution to the team and success of the final product, employees are rated on a bell curve system that makes employee success to be a byproduct of the debasement of others. Even if every member of a team is of “A” caliber the bell curve system cannot accept that; it needs losers and winners. To be effective and well compensated employees don’t need to be good at their jobs, they need to be good politicians. This turned Microsoft from a technology company into the U.S. Congress and therefore its software products started to resemble legislature by Washington’s finest — bulky and full of pork.

It is hard to stress the importance of culture for a technology company; after all it is a transit system for creativity. In an industry that was moving fast, Microsoft became fat and slow. Its products suffered. This brings us to Windows 8. I installed a preview version of Windows 8 on my computer a few months before it was officially released and was shocked at how horrible the product was. I am a computer geek, but I could not figure out how to use that product. Windows 8 was not just buggy, it was thoroughly terrible. (I penned an article about Windows 8 and my firm sold our Microsoft shares.)

I had nightmares about my father buying a notebook with Windows 8 installed and asking me for help. Only a company that is internally broken can release a product that is so important yet so bad. Microsoft did not have to release to know Windows 8 was a failure; it just had to open a browser page and do a Google search. After the release, Microsoft help sites swarmed with confused and angry people like me.

A friend of mine who used to work for MSN Money told me a story that highlighted how broken Microsoft was. At an editorial meeting somebody pointed out that a portion of the company’s website needed a small tweak. He was told that it would take a month to get it done. Remember, this did not happen at General Motors but at what was supposed to be the most advanced technology company in the world — the one that makes the software that runs the guts of our universe.

Investors applauded when Steve Ballmer announced his retirement, and the stock jumped. But the celebration is premature. Microsoft is not a growth stock that is taking a break from growth; Microsoft is a giant in desperate need of a turnaround. If the company continues to function as it did over the past ten years, it will die. The death will be gradual and at first barely noticeable, because its lock on corporate customers and its cash-rich balance sheet will afford it a slow death, but nevertheless it will have seen its best years and never be great again.

Microsoft needs a new CEO who is an outsider and not entangled in internal politics. It is in desperate need of a Lou Gerstner-like leader — who turned around another tech colossus, IBM Corp., in the ’90s — not a Steve Jobs visionary but a good manager, one who will slowly and methodically fix the broken culture (probably laying off a third of the workforce) and narrow its focus by slimming down the company.

Everyone is fixated on the price tag of Microsoft’s acquisition of Nokia’s mobile business. Most likely, the loss that will result from it is irrelevant, since $7.2 billion is just a few months of Microsoft’s cash flows and less than $1 per share on its balance sheet. But Microsoft needs to fix the culture of its 100,000-person workforce, and Nokia comes with more than 30,000 employees and its own culture ridden with success and subsequent failure (at least both companies have something in common). Microsoft’s turnaround just became at least 30 percent more difficult.

Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo.  He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).  To receive Vitaliy’s future articles my email, click here.

© 2013 Copyright Vitaliy Katsenelson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife