Breakingviews: Microsoft shows why tech cash needs a discount

NEW YORK Wed Jan 23, 2013 9:58am IST

A Microsoft Surface tablet is seen during the launch of Microsoft Windows 8 operating system in Hong Kong October 26, 2012. REUTERS/Bobby Yip/Files

A Microsoft Surface tablet is seen during the launch of Microsoft Windows 8 operating system in Hong Kong October 26, 2012.

Credit: Reuters/Bobby Yip/Files

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NEW YORK (Reuters Breakingviews) - Microsoft (MSFT.O) shows why tech cash piles should be valued at a discount. The software giant may put up $3 billion to fund a leveraged buyout of Dell, according to CNBC. Sure, the PC maker is cheap and Microsoft's investment record isn't bad. But a Dell financing would divert money that could be returned to shareholders to plug holes and postpone obsolescence.

In recent years Microsoft has dipped into its pile of greenbacks - currently $65 billion - to pay for investments that blend strategic and financial goals. In April, it injected $300 million into Barnes & Noble's (BKS.N) Nook and college businesses. About two years ago, Microsoft agreed to subsidize Nokia's cost of producing handsets in exchange for the Finns putting Windows on its smartphones. And in 2007 it pumped $240 million in Facebook.

The deals had a similar purpose. Microsoft wanted to gain ground in tablets, smartphones and social networking. So far, these are stacking up better financially than strategically, mostly thanks to its Facebook stake more than quadrupling in value. But Microsoft remains a small player in these three markets.

Any Dell deal promises more of the same, at best. The PC firm is so cheap that it may generate a good return. But it's harder to see strategic merit. Perhaps Dell would use Windows 9 in its tablets, but Dell's mobile efforts have never amounted to much. Moreover, putting capital into Dell might antagonize PC-producing rivals like HP and Lenovo (0992.HK), both big Microsoft clients.

Microsoft's bigger problem is that the PC market is declining by 10 percent a year. Making deals with struggling companies to encourage them to use its mobile products looks desperate. As the pressure on Microsoft increases, so will the temptation to be more cavalier with its investments.

Microsoft's record suggests cash hoards are a poor way to plug holes in tech dykes. Shareholders have at least not been ignored, receiving some $180 billion in dividends and buybacks over the past decade. Unfortunately, they could have received far more had Microsoft avoided costly attempts to break into new markets like search, video game consoles and mobile devices. And sitting on too much treasure can have a price. Take Apple (AAPL.O), which has $120 billion of cash, is growing nicely yet trades at just nine times this year's estimated earnings. The more tech companies make no or bad decisions about their cash, the easier it is to understand such skepticism.

CONTEXT NEWS

- Microsoft is in talks to invest up to $3 billion in Dell as part of a leveraged buyout of the PC maker, according to a January 22 report by CNBC.

- Private equity firm Silver Lake is leading the deal and has lined up financing.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.) (Editing by Jeffrey Goldfarb and Martin Langfield)

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