CastleCops® - Microsoft: What do you do with $49 billion?

Microsoft: What do you do with $49 billion?
Reuters
July 21, 2003, 7:32 AM PT
URL: http://zdnet.com.com/2100-1104-5047534.html
Microsoft is sometimes said to have a license to print money. But the company might actually find it getting tougher to handle its cash hoard of $49 billion.

When it released fiscal year 2003 results Thursday, Microsoft said it had added $2.9 billion of cash in the quarter that ended June 30. It earned $689 million from investments, nearly one-third of its pretax income, according to its fiscal fourth-quarter income statement. And on its balance sheet, Microsoft reported $13.7 billion in equity and other investments for the period ended June 30.

Despite an economic downturn and a three-year bear market in equities, Microsoft's pile of cash is actually double what it was three years ago,.

Chief Financial Officer John Connors is expected on Thursday to tell analysts how Microsoft is investing its cash.

Microsoft, whose co-founder and Chairman Bill Gates is the world's wealthiest and most famous college dropout, has nearly one-tenth of all cash on hand reported by all companies whose shares make up the Standard & Poor's 500 index.

We want to give a much broader time allocation to the management of that portfolio and what we're doing to grow it and protect it,'' Connors said in a conference call with analysts and investors after Thursday's earnings release.

The review might give some help--or sobering lessons--to investors at a time when many short-term investments yield less than 1 percent.

While it has been challenging for treasurers, many haven't made major changes in their strategies,'' said Cathy Gregg, a partner at Treasury Strategies in Chicago, which advises corporate treasurers. They're just suffering like other bond investors.''

Make no mistake, $49 billion is plenty of money. Still, Microsoft kept just $6.4 billion of its cash in cash'' investments, which mature within a year or so and are all but risk-free. The other $42.6 billion was in short-term investments,'' which might yield more but carry more risk.

Most of the investors we deal with in the bond market, when they talk about short-term investments, are referring to a one- to three-year maturity,'' said Steve Berkeley, head of global fixed-income indices at Lehman Brothers. A money market investor would look shorter than that.''

Peter Crane, managing editor of money fund tracker moneyed, noted that Microsoft has advantages that ordinary investors don't: $49 billion in cash would make it the 16th-largest U.S. money fund complex, ahead of San Francisco-based Wells Fargo.

Microsoft is large enough to get the best prices, and the largest issuers and banks will court its business,'' he said. Microsoft also isn't regulated like a fund, so there might be other investments open to it.''

Microsoft doesn't need access to all its money now--for day-to-day expenses or, as Connors said Thursday, to pay a higher dividend or make a jumbo acquisition--so it can afford some risk to boost returns. Connors might invest some of Microsoft's cash in complex derivatives or hedges, for example, if Microsoft's directors let him, analysts said.

Typically, some cash will be in bank accounts or overnight repurchase agreements or sweep accounts to maintain daily liquidity,'' Gregg said. How treasurers invest the remaining cash depends on their time frame.''

The second quarter was good for investors. The S&P 500 gained 14.9 percent, and Lehman's benchmark U.S. Aggregate Bond Index advanced 2.5 percent. Even Lehman's 1-3 Year Government Index rose 0.77 percent.

Crane, though, said it may soon be tougher for Connors, as it will be for many managers. He noted the recent rise of bond yields, including a 0.93 percentage point jump, to 4 percent, since June 13 for the benchmark 10-year U.S. Treasury note.

One of my mantras is 'return equals risk,''' he said. There may well be exposures, were rates to rise.''


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