Living off one's legacy

In the last roundup which discussed Microsoft's approach towards debt, a sort of speculation was given with regard to Microsoft's latest round of buybacks. It came from Bloomberg, based on analysis by UBS. We believe that Microsoft's new buybacks (stock repurchase program) have just begun quietly. The stock surged, initiated by what Microsoft had to say, and then came these reports, which are only good news if you are an existing investor.

Bloomberg published a story today which said that the company is about to unveil a plan to buy back as much as $20 billion of its stock. The notion was attributed to UBS analyst Heather Bellini, who actually floated the idea in a July 25 analyst report. And she is not the only one who thinks a huge buyback would be a good idea: in a July 22 post, I noted a report from Friedman Billings Ramsey analyst David Hilal, who theorized that the company could do a leverage buyback and repurchase as much as $50 billion of its shares.

Microsoft's share price is down 26 per cent so far this year. It has about $3 billion remaining of a $36.2-billion, five-year repurchase program it started in 2006.

What's happening here is simple. Microsoft elevates its stock artificially by emptying its bank account. It's not business success that drives the stock; it's the pumping of money. It's an illusion and it's provably not sustainable. Whether it's related to a general economical slump or not, well... that may be irrelevant. Investments in FOSS are said to have reached an all-time high. Recent headlines of relevance include:

• VC funding for open source hits an all-time high
• Open-source venture investing hits an all-time high
• How Open Technology Could Lead Us Out Of Recession
• No Recession at Red Hat
• Economic downturn = Financial upturn for GroundWork and open source
• Schmidt: Google 'well-positioned' for a recession
• Sun: Economic slowdown favors open source
• Software Firms Face Recession Ripple Effect
• Forrester cuts tech outlook on U.S. recession risk

That is a tipping point, no doubt.

As some people predicted, radical change in business models, software-wise, comes from implosion that the current recession can deliver.

Novell too is having a hard time. It's already in 'buybacks mode' [1, 2]. According to the following new article from USA Today, this does not look good.

Shares of Novell (NOVL), a computer networking software maker, continue to fall as the company attempts to migrate customers to newer products.

And that's the big risk: A cheap stock can get even cheaper as the business deteriorates. A stock may "look statistically appealing, and investors (are) seduced by it," says Matthew Kaufler of Clover Capital. And that's the danger, he says, of buying a stock "because of a price decline and nothing beyond that."

Microsoft and Novell are in a similar situation and on the same boat. Moreover, they are both faking it with optimism. ⬆

Image from Wikimedia