Tuesday, February 05, 2008

Yahoo and Microsoft??? Microsoft Debt?

So Microsoft has offered a bid to Yahoo! shareholders to buy out the Yahoo! common stock - or something of that nature - to the tune of $44.6 billion. Well...first, as a Yahoo! customers I do hope that this DOES NOT go through and that at the very least that the FTC blocks such a buy out from Microsoft. Ok...now that we have my opinion aside, let's look at the real deal...

Just for your information, my goal here is to get you to think about the situation.

Microsoft wants to buy Yahoo. Why? I don't know. Mini-Microsoft reported the following in his blog:

I'm surprised yet not surprised. Internally, a number of us had heard reasons from Steve Ballmer why a Yahoo! acquisition didn't make sense.

Again, I don't know why Microsoft would be going for it - especially if Ballmer has reasons that it doesn't make sense! Well...I guess it makes sense in that it would (a) eliminate a search competitor, (b) eliminate a video competitor, and (c) gain them some part of Google - Yahoo! has an investment in Google, so this would make that investment Microsoft's.

Hmm....that would be an interesting twist - buy Yahoo! so that it could then take care of its number one competitor (who isn't officially trying to compete with Microsoft) - Google. Hmm...now that might be a reason. One that is worth $44.6 Billion? I don't know.

But let's also consider this. Microsoft does not have enough cash available to actually make the purchase, which means that Microsoft would have to for the first time ever go into debt in order to make the purchase. Anyone know why Microsoft has never carried debt? Because Bill Gates wanted it that way. From the start, Bill Gates ensured that Microsoft had enough cash on-hand to run 2 years without a single sale of any product. That's quite a feat, but it's also the key to Microsoft's success. Why? They could do what they wanted and didn't have to worry about what investors might tell them to do. They didn't have to worry about bankruptcy or any of those other matters. And furthermore, they didn't have to worry about anyone trying to buy them out.


What's that? Buy out Microsoft? When a company isn't doing well financially and it has published stock, then someone might come around and try to buy that stock at an above value price (e.g. the sock is worth $5 so they offer $7) in the hopes to lure enough people to gain a controlling share and then be able to direct the company. This is usually referred to as a Hostile Takeover. Microsoft has never had to worry about anyone doing that because they have always been in good financial conditions.

Well...either Yahoo! has royally pissed off Microsoft, or they have enough financial trouble that they are ripe for such a buy-out and Microsoft is growing impatient with waiting out the talks they have been in with Yahoo! for some time on the subject. No - I don't know why.

But why is Microsoft all of a sudden loosing their patience? Why are they all of sudden willing to go into debt to finance this deal?

To be short, Microsoft is at a big cross-roads right now. Not only are they losing their big leader and founder - Bill Gates, who is retiring to pursue philanthropy with his wife - but they are also facing the stiffest competition they've had in years - probably since the early to mid-1990's - and from Google (you know that "big" search company that Yahoo! owns a share of). Additionally, Microsoft is about to lose everything - or rather, we'll learn just how much Microsoft will lose by the end of this month, and it has everything to do with OOXML.

What is OOXML?
It's Microsoft new formats for its Office Productivity programs, namely Excel, Word, and Powerpoint, and its the default/primary format used by Office 2007. You need special plug-ins for Office 2003 to be able to read it too. But it's more than that. Office 2007's format is a super-set to OOXML, and will always be so. OOXML is just the part of that file format the Microsoft submitted to ECMA for approval as an industry standard, and which has been submitted to ISO to become an international standard for the world. Problem is that even with Microsoft stuffing the ballots, they still lost the initial vote in the fall of 2007. In February 2008 (this month!) there will be a ballot resolution meeting (BRM), and we can expect Microsoft to be trying to stuff that in its favor to. You can find more about that from Bob Sutor who does a great job in covering the topic.

Why is OOXML so important to Microsoft?
Needless to say, Microsoft has a lot at stake with OOXML. If they are unable to get OOXML approved by ISO as a standard (which on technical merit it should not be approved), then the Office Document Format standard will go to Microsoft's biggest Office Productivity competitors, who all back the OpenDocument Format (ODF), which is already an ISO standard. ODF achieved its ISO status by going through the entire, lengthy process; where as Microsoft is trying to ram OOXML through the process as fast as possible - regardless of the cost either to itself or of ISO's reputation. But that's business as usual for Microsoft.

Furthermore, the OOXML spec is centered around Microsoft technologies and issues. For example, there are/were several implementations for how to format a Date-Time value - they were all focused around how Microsoft Windows performs date-time functions, and the bugs associated therein. Another example is the custom drawing specifications used. The spec is riddled with it, and nearly all of them are not complete in their descriptions. As a result, the OOXML spec is over 6,000 pages long, and re-implements a lot of things that ISO has already created a spec for (e.g. MathML) while tying those same things to Windows.

Thus for Microsoft, to lose OOXML is to lose Microsoft Office is to lose Microsoft Windows.

Microsoft Financials
As I stated earlier, Microsoft has never had debt - thanks to Bill Gates. And thus far they haven't needed to as their Windows and Office products yield a billion dollars in profit a month last I heard). And AFAIK, most other products by Microsoft either do not yield any profit whatsoever, or do not yield a lot of profit. So what would it mean for Microsoft to lose Office or Windows? It would mean that the company would need to raise money to continue its business.

What's that Microsoft's business relies on its monopoly status? Yep - that's right. If Microsoft loses Windows or Office (or worse yet - both) then its lifespan will be limited thereafter since it would have to turn the other businesses into things that are a lot more profitable than they are

However, that has been how Microsoft has always been. So what's changing? Bill Gates is retiring. That's the big change. But what does that mean?

Bill Gates retires from Microsoft
One of the biggest challenges a company can face is the retiring of its lead executive, and its founders. In the case of Microsoft that big challenge comes with the retirement of Bill Gates.

We've seen what this can do to a company every time Apple ousts Steve Jobs. What happens? The company tanks after a few years and then ends up bringing back Jobs to save the day. Fortunately for Apple Steve really cares about the company and thus comes back. Apples biggest challenge, therefore, will be when Steve dies and they can't bring him back. That very well may be the end of Apple. (Sad, but we'll see when it happens. Hopefully that won't be for a long time, but it is inevitable.)

Microsoft hasn't had to face that situation yet. Bill Gates has pretty much been in charge since day one. Only in the last 18 months or so has he been taking a more secondary role - but even then, he's still very much been in charge - just differently. Fortunately, if Microsoft has problems it might be able to bring Gates back since he is only retiring and won't be dead.

However, at least from the recent discussions about Microsoft buying Yahoo! the new management feels debt is okay. But can Microsoft risk the debt? Think about it. I think not.

Suppose the BRM goes in Microsoft's favor - then they can rely on the continence of their monopoly on Office Productivity and Windows and they'll be okay. They'll be around in 50 years.

But suppose the BRM doesn't go well for Microsoft, and OOXML is rejected by ISO. It'd only be a matter of time before people start seeking other, less expensive Office Productivity software - and likely only a little longer than that before a greater switch from Windows to other platforms such as Linux or Mac OS X - which are already starting to eat a little (not much) into Microsoft's market share. At which point, they lose the income, and possibly the company there after.

If Microsoft does not take on the debt to buy Yahoo!, then they'll have enough money to perhaps go a few years without sales and then release a new, more competitive product that does support ODF and perhaps actually becomes something people want - instead of using because it's just what everyone else uses and/or they don't have a choice.

But IF Microsoft does take on the debt, then they won't necessarily have the money to do so. Their current AA or AAA rating will quickly sink. All of a sudden those bonds would be worthless.

So the question comes to this - can anyone really afford to buy those bonds if Microsoft were to issue them? Perhaps if you have a lot of money and don't care. But if you really do care about actually getting that money back with at least the inflation rate, then no, I don't think you can really afford those bonds - at least not without knowing the outcome of the BRM and whether OOXML becomes an ISO standard. But we won't know that result until May or June, if I understand things right, as there is a 30 or 60 day period after the BRM for countries to decide what they are going to do - whether they're going to change their votes or not. If the votes stand with no changes, then OOXML will fail to gain ISO support. It will actually take quite a bit of change for Microsoft to get OOXML approved, but they have a chance - I think they need like 7 to 9 votes to change from 'no' to 'yes', and that's only if no one changes from an 'abstain' or 'yes' to 'no', in which case they may need more yet.

Can Microsoft really afford to buy Yahoo! for $44.6 billion? I don't think so at least as OOXMl currently stands with ISO. We'll know better after that issue is resolved.

No - I don't have any inside information with Microsoft. I don't know what they're thinking. This is just my understanding of the events as they are unfolding, and my understanding of business and finances. In no way am I an expert in these fields, but hopefully I've caused you to think a bit about the topics (that was my goal) - whether you are an expert or not.