This paper examines corporate stock repurchase strategies, with a focused case study on Microsoft's buyback programs of 2006 and 2008. It begins by outlining the primary reasons companies engage in share repurchases — including reducing shares outstanding, strengthening stock value, enabling employee ownership, and managing shareholder expectations — while noting the regulatory role of the SEC. The paper then analyzes Microsoft's specific repurchase activity, including its completed $30 billion buyback and subsequent $40 billion program, its modified Dutch auction tender offer, and concurrent increases in dividend payments. Additional context is provided through Microsoft's antitrust litigation history, its pivot toward software-as-a-service, and its roots as a venture capital success story. The paper concludes by exploring how both legacy and new investors shape Microsoft's ongoing obligations to return value to shareholders.
Stock repurchasing has become a fundamental aspect of both high-yield company strategies and the public trading of stock in general. This paper first explains the reasons why a company might choose to develop a stock buyback strategy and what challenges and restrictions it faces in doing so. It then develops a case-study understanding of the repurchasing strategies Microsoft employed in both 2006 and 2008.
Microsoft's stock repurchasing strategy is in part a response to its history as a venture capital investment. Individuals who invested in the company early and continue to retain an interest in it clearly expect continual payoffs — if not a windfall, at least growth in payments reflective of the company's success.
Stock buyback strategies are functional economic choices made by some publicly traded companies to identify when surplus shares are believed to be trading and to attempt to remove such shares from circulation. The company may do so for several reasons, but ultimately it acts to resolve this problem in a manner similar to the way currency circulation is tightly controlled. When too many physical bills are in circulation, they tend to reduce the actual value of the currency. In other words, surplus currency must be removed from the market either by retirement or by strategies that place the currency in a position where it is no longer being actively circulated — such as when currency is held in a collection. Stock repurchasing can result in either solution: retirement, or retention within a stock package that will not likely be traded, such as an employee benefits package (Wadhani, 1999, p. 186).
A number of studies have shown that stock repurchases result in a positive market reaction (see Dann, 1981; Vermaelen, 1981). In the absence of agency considerations, if a firm is on average at an optimal capital structure, any change in that structure should result in a systematic negative return. However, if the agency conflict between the shareholder and the manager is not fully resolved, a stock repurchase will increase the managerial share of equity and therefore improve the incentives for aligning management's interests with those of the remaining stockholders — unless, of course, management is already entrenched. This factor could be the driving force behind positive stock market reactions to stock repurchase decisions (Swanson, Srinidhi, & Seetharaman, 2003, p. 105).
As suggested above, there are several reasons why a company might develop a share buyback or repurchase strategy. The primary reason is to reduce the number of shares on the publicly traded market, which makes the remaining shares more valuable and pays out greater per-share dividends to investors without creating an undue burden on the company. The company might also be seeking a way to strengthen its stock in general by reinvesting in its own shares rather than directing surplus profit toward another strategy with lower yield and lower fundamental payout over either the short or long term. A tertiary reason for developing a share buyback strategy might be to facilitate employee stock ownership — secondary to individual stock trading and sheltered to some degree as part of a benefits and/or compensation package. Finally, a company may choose to develop a buyback strategy in an attempt to bolster stock prices for publicly traded shares when those shares are in a slump and not meeting investor expectations (McCarthy, 1999, p. 91).
The strategy is in fact on the rise, creating a whole new set of challenges for those who regulate stock transactions — namely, the Securities and Exchange Commission (SEC). The practice must be conducted under publicly accepted and legally established procedures that are completely free of potential insider trading, which is illegal. Companies must follow very specific guidelines defining the scope, scale, and duration of the buyback strategy and then must follow through with that strategy regardless of its effects. The increased popularity of such plans stems from their apparent effectiveness as a means of redirecting unused profit back into the system without actually paying out dividends equal to the amount of profit earned. The company becomes more fundamentally valuable without incurring losses or making payouts that may create a double taxation issue for shareholders — including, in many cases, their own employees (McCarthy, 1999, p. 91).
Managers also clearly stress that excess cash held by the company is best recirculated through stock repurchasing rather than dividend percentage increases, which managers find fundamentally difficult to manage. Raised dividend percentages often must remain at the elevated level indefinitely, which may not reasonably reflect the company's need for equity during leaner times.
An open market stock repurchase program is a popular method used by management to increase value to stockholders. Management can buy back stock, raise dividends, increase capital spending, or make acquisitions to deploy excess cash. In an Institutional Investor (August 1997, p. 31) survey of 1,600 chief financial officers on what they would most want to do with excess cash, the most popular response (36.2%) was to buy back stock, while the least popular (2.1%) was to raise dividends. In another Institutional Investor (July 1998, p. 30) survey, the most commonly cited motivation by CFOs for repurchasing stock was "to add value for shareholders" (Liano, Huang, & Manakyan, 2003, p. 97).
Shareholders have significant expectations in today's market, and this is especially true of those who rely heavily on a non-diversified portfolio, holding only a few key stocks rather than smaller quantities of many. These individuals sometimes have significant influence within the company and build considerable loyalty to it. The management of shareholder expectations is a highly challenging aspect of running a publicly traded company, and dividends are intentionally limited to reflect the need for the company to retain cash during lean times or reinvest in other ways during periods of transition. If dividend payments are inflated at every turn of the market or business cycle, the management of that trend often moves in only one direction — upward — rather than adjusting both ways (Silva, Goergen, & Renneboog, 2004, p. 27).
Some industries prefer, based on historical experience in their particular trade, not to make grand announcements about stock repurchasing plans but simply to implement them as needed (Giambona, Giaccotto, & Sirmans, 2005, p. 351). Other industries, however, have such broad social interest and such a large variety of shareholders that announcements of share repurchasing plans are essential, at least within the relatively open arena of shareholder communication networks. One such company is Microsoft.
Microsoft has developed and utilized stock repurchasing strategies in recent years and has done so in a very public manner. The stock buyback announced at the close of 2004 — formally intended to repurchase over $30 billion in Microsoft stock — was completed at the close of 2006, and a new stock buyback program was announced that would repurchase $40 billion in Microsoft stock. According to Microsoft's 2008 annual report, the results were successful and the program was set to continue until 2011. The share activity reported (in millions) for the year ended June 30 was as follows:
Balance, beginning of year: 9,380 (2008) / 10,062 (2007) / 10,710 (2006)
Shares issued: 173 (2008) / 289 (2007) / 106 (2006)
Shares repurchased: (402) (2008) / [redacted] (2007) / (754) (2006)
Balance, end of year: 9,151 (2008) / 9,380 (2007) / 10,062 (2006)
Notes: (1) All amounts repurchased in fiscal year 2008 were repurchased under the repurchase plan approved by the Board of Directors on July 20, 2006. (2) Approximately 155 million shares of common stock for approximately $3.8 billion were repurchased under a tender offer in the first quarter of fiscal year 2007; all other amounts repurchased were under the plan approved July 20, 2006. (3) All amounts repurchased in fiscal year 2006 were repurchased under the plan approved July 20, 2004. (MSFT Annual Report 2008, "Note 16: Stockholder Equity")
Microsoft also demonstrated an unconventional trend by increasing its dividend payout per share from $0.10 to $0.11 over the course of 2008 (MSFT Annual Report 2008, "Note 16: Stockholder Equity"). The stock repurchase program thus appears not to have completely satisfied the company's goals for cash deployment and investor demands. Nevertheless, the strength of such action is clearly demonstrative of the company's financial health and moved stock prices forward despite the broader slump associated with the recession of that period.
Many people have a great deal of social and economic interest in Microsoft, in part because it is so well known and has influence over many lives as the largest provider of personal computer operating systems and software in the world ("Gates, Bill," 2007). The company is considered a regional financial backbone in the Seattle–Redmond area where its world headquarters are located, and the whole region — and to some extent the whole world — takes notice when Microsoft announces financial strategies or when its stocks rise or fall.
As reported at the time, Microsoft said it would buy back $20 billion through a tender offer set to be completed on August 17. The company's board of directors also authorized a buyback of up to $20 billion worth of stock through June 2011, having completed the $30 billion stock buyback announced two years prior. Microsoft's Chief Financial Officer stated: "With our share repurchase programs announcement today, we reaffirm our confidence and optimism in the long-term future of the company and continue to execute on our strategy of returning capital to shareholders." For its tender offer, Microsoft used what is known as a modified Dutch auction, in which those who want to sell shares can indicate how many shares they wish to sell and at what price. Microsoft said it would pay no more than $24.75 per share and not less than $22.50. The buyback offer was expected to run through August 17 and could see the software maker repurchase up to 808 million shares, or about 8.1% of all outstanding shares (Fried, July 20, 2006).
"Antitrust litigation and software-as-a-service shift"
"Microsoft's roots as a venture capital success story"
"New investors and ongoing shareholder obligations"
Those who invest in Microsoft today do so because the company has passed the venture status period and is now a solid contender for continued growth. These new investors expect just as much as those from Microsoft's venture capital past, as they seek — through substantial investment — to securely hold and grow their own portfolios at a steady rate of return. In fact, it is the marriage of these two investor groups that likely spurs decisions regarding issues such as stock repurchase programs, as Microsoft seeks to reinvest cash profits in a way that supports investor interests in the company.
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