Friday, May 10, 2002

Microsoft's cash woes Microsoft has $40B in cash, and this is a problem. Companies exist to generate profit for their investors via 1) dividends, 2) projects that make even more money, and 3) share repurchases. Dividends are heavily taxed, so this is a stupid way of compensating investors (although some companies still do this). New projects are good, but only if they make money and it's unlikely that Microsoft can ever match its historic profit growth. That leaves repurchases, which I'm guessing Microsoft's avoiding because it's the same as admitting it has no good business ideas.

Employees will give up salary for growth, which is how Microsoft (and others) can get away with paying below market wages. But eventually growth stops and disillusioned employees bid their salaries up, and the company makes all its residual profits in the time lag in between these two events. (Note: If there was no time lag the company would make no excess profits, for rational employees the NPV of salary is the same between average wages throughout and low wages first, high wages later).

Microsoft pays out a lot of options. If the company ceases to grow, this form of deferred compensation becomes unattractive and employees will start demanding cash up front. Profits will shrink, but more importantly, the stock valuation will fall (as there are no more growth opportunities) leading to an even higher demand for wages now.

So why is Microsoft sitting on all this cash? Because it doesn't want its employees (and the market) to know it's out of growth opportunities.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home