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10.17.10

Unsubstantiated Takeover Rumours

Posted in Microsoft, Rumour, Search at 12:31 am by Dr. Roy Schestowitz

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Summary: Why Microsoft will not manage to grab yet another Internet giant, not any time soon anyway

CONSOLIDATION sounds like a nice word, but usually it means removal of choice and that’s not necessarily a good thing. Microsoft has already eliminated the second search engine in all sorts of nefarious ways. Microsoft never bought Yahoo! It just achieved a sort of hijack from the inside. The company is now run by many former executives of Microsoft.

Well, one reader from Brazil told us about reports like this one yesterday:

AOL Inc. and several private-equity firms are exploring making an offer to buy Yahoo Inc., according to people familiar with the matter, devising a bold plan to marry two big Internet brands facing steep challenges.

Considering rumours/speculations that turned out to be false regarding Adobe takeover, Nokia takeover, and even AOL [1, 2, 3], it’s probably a case of boy crying “Wolf!”

Microsoft cannot afford to buy anything significant anymore (it would require borrowing more money), so for anything significant to happen here is unlikely unless the takeover is indirect. As Cringely put it:

If you think AOL actually intends to buy Yahoo, you are wrong. That story hit the press this week but it’s a ruse to motivate Google exactly as I explained a few days ago. AOL has neither the money nor the motivation to buy Yahoo, which is analogous to a bus company buying a poorly-managed airline. AOL just wants to make Google jealous.

In other Yahoo! news, it’s harmed by Google’s Instant despite revamp attempts. Is Yahoo! still developing a search engine? Why bother anymore? Won’t Microsoft just devour the whole thing?

To Microsoft, Yahoo! is just a tool now, just like SCO was once a tool. Now it’s just dead:

SCO’s stock is now back up to 7 cents, up from 2 cents or maybe less — I don’t track it closely — and 7 is where it’s been hovering most of the time for the last few months. Do people really make money from these little dips and surges? What a life that must be. That is actually a fraction of a penny higher than the stock sold for on the day SCO filed for bankruptcy. Go figure.

There’s a long list of companies that ended up as corpses outside Microsoft’s lair. Which one will Microsoft exploit next?

“On the same day that CA blasted SCO, Open Source evangelist Eric Raymond revealed a leaked email from SCO’s strategic consultant Mike Anderer to their management. The email details how, surprise surprise, Microsoft has arranged virtually all of SCO’s financing, hiding behind intermediaries like Baystar Capital.”

Bruce Perens

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13 Comments

  1. Nate said,

    October 17, 2010 at 8:54 am

    Gravatar

    As useful a resource Techrights is to follow this sort of news, you’re also a source of unsubstantiated rumours, such as constant allusions to Microsoft’s supposedly deteriorating finances.

    “Microsoft cannot afford to buy anything significant anymore (it would require borrowing more money)”

    As much as many of us would love to believe it is true, Microsoft is NOT facing financial hardship. How can you justify stating that they cannot afford to acquire anything significant when they have 37 BILLION U.S. dollars in cash and short term investments on hand? This isn’t a figure which has gone down but one which has gone up from the year prior reports. The debt figures you would point out are but a small fraction of that amount.

    Microsoft isn’t becoming any smaller as a company either. From the year ago reports, Microsoft’s total assets have risen by 8 BILLION U.S. dollars, while their total equity rose by 7 BILLION U.S. dollars. All of this is very clearly on record with the United States Securities and Exchange Commission.

    From the year ago report, Microsoft’s total revenue has gone up; their gross profit has gone up; their net income has gone up. Microsoft’s growth may not be what it used to be, their future prospects might not be bright, but to paint their finances as if they are dire is either naive or dishonest.

    Dr. Roy Schestowitz Reply:

    Take a look at this page. Things are not as simple as it would have journalists believe.

    Nate Reply:

    I’ve probably read (or at least skimmed) most of those posts, as I follow your RSS feed “religiously.”

    The reason I made the comment above is because I have not found your posts I’ve read about Microsoft’s finances to be very persuasive. For example, the post you link to above makes a big deal about the fact that Microsoft hasn’t made an acquisition yet this year. So what? Neither has Red Hat. In fact, Red Hat is currently in the midst of their longest run without an acquisition since they made their first in 1999. Red Hat is arguably stronger now than it has ever been and is growing like crazy.

    I think it is disingenuous to make claims that Microsoft “can’t afford” to make an acquisition, and especially that they would HAVE TO borrow money in order to do so when Microsoft currently has enough CASH money in their pocket to make ANY BUT ONE of the acquisitions they’ve made since their first in 1987. That’s acquisitions they could practically make at a moment’s notice. That’s not counting what’s possible if they were to adjust their short term investments, which I believe would be typical for a company making an acquisition.

    Finally, you don’t seem to understand that debt can be rational. Why is Microsoft borrowing money when they have the money, you might ask? If you are genuinely interested in knowing an answer, you should consider that it is a business decision, and that business decisions tend to be made with the goal of maximizing profit, which Microsoft has obviously been successful in doing to some extent. Microsoft currently has 31 billion USD in short term investments they can pull from, but they don’t. Why? One potential reason is that the interest rates they are paying on loans they take out are lower than the return rates they are realizing on those investments. This is basic economics. (I do have a minor in Economics, for whatever that is worth.) One of my professors in the economics department at the university I graduated from told us how, after all these years, he still owes a bunch of money on his student loans (despite that he makes a very comfortable salary at a top university and could pay them off at any time). He makes the minimum payments each month, and he says he’ll still be paying off those loan when he dies. This isn’t an indication that he is in bad financial shape, or that he is forced to keep that debt, but rather an indication that he made a rational economic decision based upon opportunity costs. His loans are locked at a low interest rate, and paying them off will not save him as much money as he will make putting the money to use elsewhere.

    My point is that your posts on that topic seem to be based more upon wishful thinking than on rational consideration. Maybe I’ve missed something. I’ll watch your posts on the subject more carefully. Perhaps you will agree to do the same?

    twitter Reply:

    The company has squandered all advantages and is clearly on the rocks. Just a few years ago the company claimed to have $60 billion in cash and zero debt. That they now have billions of dollars in debt and claim to have far less cash means they have flushed a great deal of money down the toilet. I started a little Microsoft Death Watch a few years ago to track these developments, but it is pointless because Microsoft lies about everything they do. As several hushed up former employees prove, Microsoft especially lies about money. If Microsoft has built up any cash reserve, they have done so by axing about ten thousand employees and all manner of monopoly supporting divisions. Calls from Wall street to basically follow Judge Jackon’s anti-trust wishes and their continued low stock valuation tell the story better than I can. Microsoft is well known as the poorest performing tech stock. The only wishful thinking that can go on is Microsoft thinking they can compete with free or sell thousand dollar computers like it was 1995. It smells like Enron or Worldcom to me.

    I don’t expect them to last much longer because their primary money makers, Windows and Office, are poor performers in every sense. Vista, Windows 7 and several versions of Office have all been resoundingly rejected by the market and rival systems have held proffits very low. Almost everything else they do loses heaps of money, yet the company continues to axe programmers, so they won’t be able to fix their software. Their choke hold on the US retail is costing their partners a fortune. Their next quarterly report will be amusing.

    Dr. Roy Schestowitz Reply:

    It’s not just that they axe employees. Many of them are paid less (fewer benefits and working on visa/overseas in Asia).

    To me, some things just don’t add up. Windows revenue declined and now there’s this:

    Microsoft’s operating margins for the Windows operating system business have declined from an estimated 77% in 2006 to around 68% in 2009. We expect this margin decline to continue over our forecast period as netbooks and Windows sales in emerging markets account for a bigger share of Microsoft’s sales mix.

    Nate Reply:

    “That they now have billions of dollars in debt and claim to have far less cash means they have flushed a great deal of money down the toilet.”

    Not necessarily. You should report back to us with the other relevant figures Microsoft reported at that time, if you have easy access to that information, so that it will be clear whether that is the case.

    Say that I start with a million dollars in cash and no debt, but then I buy a factory and equipment and then have only 200 thousand dollars in cash and 50 thousand dollars in debt. If my total equity at that point is greater than or equal to the original million dollars, I haven’t squandered anything.

    Dr. Roy Schestowitz Reply:

    Microsoft has investments, assets, and reserves. It also has debt. Novell is the same. It’s still not the ideal position to be in, especially if the debt keeps growing (Microsoft, unlike Novell) and the assets lose value (both Novell and Microsoft).

    twitter Reply:

    Microsoft would be in great shape if Vista 7 and Office were productive assets instead of universally loathed failures. As things are, they can’t afford to spend their monopoly rents on Kin, Zune, Bong, employees and a host of other advert “squirting” stuff that’s gotten the axe. What’s worse is for them is the emergence of cheap, portabe computers and that people are starting to understand software freedom. Microsoft can’t maintain their non free software model when retail prices dip below $200 per computer and that is the future for most people. Apple and the telcos are doing a wonderful job of demonstrating just how bad non free software can be on those devices. Even if Microsoft had the technical ability to compete they won’t succeed because the corporate culture is so arrogant, greedy and malicious. This conversation is an exercise in restating the obvious.

    Dr. Roy Schestowitz Reply:

    Nate has raised legitimate points which are worth addressing for others to whom the answers require further discussion. Being challenged is an OK thing.

    twitter Reply:

    I disagree that there’s a legitimate argument here. Nate has disregarded facts and a consensus opinion that stretches from Time Magazine to Wall Street, to groundlessly accuse Techrights of “wishful thinking”. I’ve watched long time Windows users sigh over the poor quality of Vista and Windows 7, Microsoft’s inability to keep up basic function is that obvious. Most Microsoft people still see Windows as “the center of the universe” and that makes them think Microsoft is eternal. Creating this irrational belief is the only thing Microsoft ever did well, but the illusion faded for most technical people years ago. Steve’ Ballmer’s ranting and raving has not turned things around. The next few quarterly reports will prove the financial failure of Windows 7 and that will pretty much seal the company’s fate.

    Dr. Roy Schestowitz Reply:

    This new departure is an early clue.

  2. Nate said,

    October 18, 2010 at 7:32 pm

    Gravatar

    twitter,

    You’re arguing a separate topic, and you’re arguing with people who agree with your overall point.

    Dr. Roy Schestowitz Reply:

    I think he misidentified a sceptic.

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