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2. Why Microsoft Might Actually "Crash"

Everyone knows (if they know anything about computing) that Microsoft doesn't produce the most stable computer software around. What is less obvious is that there are some problems associated with their hefty growth over the last few years.

Microsoft has seen its stock rise in value manifold over the last few years, but may soon see a real problem that results from their rather intense growth combined with the use of stock options to attract new employees despite what are less-than-stellar salaries...

This implies that employees are, on average, millionaires, simply on a stock ownership basis. This is not diminished too substantially by the issue of the (not necessarily known) exercise price. If options were issued two or three years ago, when stock prices were in the $30 range, it's likely that the strike price is somewhere in that range. Recent prices in the $150 range (December 1997) make the difference between strike and actual price large enough to make it highly worthwhile to exercise the option.

There's little question but that this is a sufficient quantity of stock to significantly dilute ownership by non-employees in the marketplace were employees to exercise their options.

The more serious problem is that this all leaves Microsoft with a "slippery slope." In order to continue to keep and attract staff, there are choices of:

In short, there aren't any particularly good options.

Beyond that, Microsoft has messed enough companies up between rapacious buyouts, less-than-honest marketing, technology that doesn't work very well, staff raids (Borland and Novell come particularly to mind), and "joint ventures" that typically amount to organ donations (IBM, Digital, Sequent, Fulcrum) that the computer industry is full of people that would be happy to see them falter.

Licensing fees are increasing as they push NT Server everywhere, and it turns out that NT isn't cheaper than Unix once Microsoft starts charging the real rates that you pay when they're not courting you...

I'm not just talking out of my hat; there are some real references that document the "option" situation:

2.1. Microsoft looks to boost stock buybacks

Copyright 1997 The Seattle Times Company, Oct. 7, 1997

By Miles Weiss Bloomberg News

WASHINGTON - Microsoft has suggested it would boost stock repurchase efforts that have failed to keep pace with the number of shares issued to employees.

The Redmond software giant relies on stock options as a substitute for high salaries and cash bonuses to attract and retain employees. At the same time, Microsoft buys back stock in the open market to prevent employee awards from diluting the value of shares held by investors.

However, a recent Microsoft regulatory filing highlighted a problem, stating that "despite recent increases in stock repurchases, the buyback program has not kept pace with employee stock-option grants or exercises." While Microsoft spent some $6.2 billion since fiscal 1990 to repurchase 154 million common shares, the company also issued 363 million shares under employee stock plans.

Microsoft may be planning to address the creeping increase in shares outstanding, which ultimately erodes shareholder value. Microsoft signaled in the regulatory filing that the company would tap its $9 billion in cash and short-term investments as of June 30 to buy back stock more aggressively than in the past.

Among other uses, these funds will be available to "fund an increased stock-buyback program over historical levels to reduce the dilutive impact of the company's employee stock option and purchase programs," Microsoft said in a filing Sept. 29 with the Securities and Exchange Commission.

The promise to buy back stock comes just months after Microsoft halted such purchases, stating that the shares had become too expensive. Microsoft shares have roughly doubled during the past 52 weeks and trade at 42 times estimated earnings for the coming year.

After spending some $3.1 billion on repurchases during the first nine months of the year ended June 30, Microsoft stopped buying shares in the fourth quarter. The company said in its fourth-quarter earnings release that repurchases would resume in fiscal 1998, but it didn't give any indication of how large the buybacks would be.

While company officials declined comment on the SEC filing, one reason behind the possibility of increased purchases may be Microsoft's bid to increase its dominant position in the computer software and Internet industries.

Microsoft must hire more people as it expands.

"Their headcount continues to grow substantially," said Sanjiv Hingorani, an enterprise software analyst at Furman Selz in New York. "People don't go to work for Microsoft purely on cash compensation. Almost every professional employee gets options."

Moreover, as the shortage of skilled computer experts grows more acute, Microsoft may have to boost the size of stock-option packages offered to prospective employees. This exacerbates the dilution of Microsoft shares caused by option awards.

Copyright 1997 The Seattle Times Company

2.2. Still Another Analysis


...the marketplace values Microsoft at twice what it values Philip Morris, yet Philip Morris generates more operating cash flow than Microsoft's _revenues_. [...] Such disparities remind me of other "Nifty 50" time periods, which eventually came to dramatic ends with substantial declines in stock prices.

--Donald A. Yacktman, [ Yacktman Funds 1Q 1998 report]  

It may be true that tobacco companies have some substantial potential legal liabilities what with various lawsuits due to the health hazards of tobacco. If there is any further penetration of less-than-robust Microsoft products into financial and health services industries, that may open them up to similarly substantial liabilities due to losses resulting from system crashes...

There appear to be some further analyses:

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