Bonum Certa Men Certa

When Microsoft Corporation Met Debt

Microsoft's IBM-isation is closer than you might realise

For a fact, Microsoft might soon enter debt and we have been studying for quite some time the true story behind Microsoft's PR and accounting walls. Not so long ago we returned our attention to the issue of misconduct, including systematic kickbacks. There is more to bribery then just kickbacks, which themselves as a subtle form of bribery more severe than lobbying, which is legalised to a greater or lesser degree.

Reuters has just published an article about the government's new and more aggressive effort to curb briberies. Here is the opening portion of an article you might find surprising (witness the true scale of corruption):

Companies under investigation for violations of U.S. bribery laws will likely face heightened scrutiny from law enforcement officials all over the world as probes widen and spill across borders, a study found.


Yesterday, having taken a look at Microsoft's SEC filing, Groklaw brought attention to the following article titled "Debt in Disguise" and we shall return to this in a moment.

The purpose of securitization is to make the credit rating of the company practically irrelevant in a financing, so that even in a bankruptcy the receivables cash flow will be protected....

The rating agencies also rely greatly on legal constructs that say the payment stream to investors will not be hindered. For instance, the transfer of receivables to the SPE must be a "true sale." That is, the seller must not retain too much of the reward or the risk coming from the asset, says Robert Hahn, a partner with Hunton & Williams LLP. In addition, the SPE has to be "nonrecourse" — in other words, the company's creditors must not have claim to the assets of the SPE if the originating company goes bankrupt.

"Securitization divorces the creditworthiness of the [company] from the credit of the pool," says Mark Spradling, a partner with Vinson & Elkings LLP. "True sale and nonconsolidation are part of that separation."

But the opinion that legal control of receivables has passed to a third party has not been litigated in the bankruptcy courts....

Tapping the capital markets without a lending bank in between means that even non-investment-grade companies can finance at near what triple-A companies pay.


From the latest SEC filing, the portion of interest was this. Read it very carefully.

Antitrust, unfair competition, and overcharge class actions. A large number of antitrust and unfair competition class action lawsuits have been filed against us in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of our PC operating system and certain other software products. We obtained dismissals of damages claims of indirect purchasers under federal law and in 15 states. Courts refused to certify classes in two additional states. We have reached agreements to settle all claims that have been made to date in 19 states....

Other antitrust litigation and claims. In November 2004, Novell, Inc. filed a complaint in U.S. District Court in Utah, now consolidated with other cases in Maryland, asserting antitrust and unfair competition claims against us related to Novell’s ownership of WordPerfect and other productivity applications during the period between June 1994 and March 1996. ...

Patent and intellectual property claims. We are vigorously defending more than 45 patent infringement cases. ...

Adverse outcomes in some or all of the matters described in this section may result in significant monetary damages or injunctive relief against us that would adversely affect distribution of our operating system or application products. We may enter into material settlements because of these risks. ...

As of December 31, 2007, we had accrued aggregate liabilities of approximately $840 million in other current liabilities and approximately $660 million in other long-term liabilities for all of the contingent matters described in this note. While we intend to vigorously defend these matters, there exists the possibility of adverse outcomes that we estimate could be up to $4.1 billion in aggregate beyond recorded amounts. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our financial position and on the results of operations for the period in which the effects become reasonably estimable.


Bear in mind that later today Microsoft is likely to be slapped by a very considerable fine for its market abuses. This is important. Consider this in light of Microsoft approaching debt (unless it's already in concealed debt) and look back at the article "Debt in Disguise". According to Steve Lake's latest analysis, none of this is so far fetched.

If you don't believe me, take a look at what's happening out there. Linux is cutting into Microsoft's desktop dominance. It's also wiping away any hope of it gaining server dominance. Firefox is quickly replacing its browser as the preferred method for surfing the internet. Outlook is being slowly knocked off its pedestal by open source alternatives, and other competitors are attacking them from all sides in their other fields as well. Open Source is on a roll and Microsoft is getting run over on all sides, and while it may not seem like they're loosing the war, they are. Just because Open Source isn't in the mainstream news doesn't mean it's not winning. And if this isn't causing Microsoft and Steve Balmer to reach the point of being nearly panic stricken, then I'm a monkey's uncle. I honestly believe right now that they're terrified. Hence the battle for Yahoo is a battle for their very existence.


The word "terrified" is the same one that we used a week ago. The taxoperability program was a desperate attempt to escape the Big Fine which is yet to be announced (c/f aforementioned hyperlink). It was an attempt to please the EU while securing some revenue ('software patent tax'). Without the EU's nod of approval, will Microsoft gradually go into debt? How does Yahoo fit into this and are OOXML, Silverlight and other anti-LAMP/standards technologies merely a desperate late attempt?

“Why else would many of Microsoft's top executives be dropping like flies and escape the company?”Do bear in mind that, as Glyn Moody puts it, Microsoft's dumping of Silverlight for youngsters was truly a giveaway (a word that we used only two days beforehand. It gave away Microsoft's fear.

If you think all of this is crazy nonesense, be aware that we were cited in Linux Journal, among other publications that start to recognise Microsoft's financial weakness, which the company has effectively been hiding for quite some time. Why else would many of Microsoft's top executives be dropping like flies and escape the company? Again, it's quite a giveaway. Microsoft was caught with its pants down when trying to spin this. Do not be hypnotised.

Further reading:



"But the $29 billion on hand at last count was less than half the cash and short-term investments held by Microsoft about two years ago."

--Todd Bishop, Microsoft Watcher, Seattle P-I

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