Before we start discussing the Microsoft case, here’s a sneak peek for you.
He started a hot dog shop with 5 of his friends in a remote area and today only makes $100 a day in profit which he shares equally with his friends.
For you it is a decent return on the initial investment of $2000 that you invested at the beginning.
One day, one of your friends comes along and declares that he is willing to buy shares if any of you are willing to sell and sets the price range from 1800 to 2100. The lowest offer will be accepted first.
What will be the first thoughts on your mind?
– Why do you want to increase your participation in the company?
– Are there opportunities I can’t see?
– The next thing will be what will be the future of the hotdog sales business.
The same mechanism is at work in Microsoft’s $20 billion share buyback through the Dutch auction from July 21 to August 17.
The proposed Dutch auction price range is $22.50 and $24.75
There are two mechanisms at work here –
First, Microsoft wants to give as little as possible to its shareholders and it is up to the shareholders to decide how they perceive the future of the company.
Suppose the company is willing to repurchase 1,000 shares in the market and has received offers for 100,000 shares. The breakdown of 100,000 shares is as follows
At $22.50 – 100 shares
23 B$ – 700 shares
C$23.25 – 200 shares
D$23.50 – 10,000 shares
E$24 – 89,000 shares
Microsoft will only pay $22.50 for 100 shares, $23 for another 700 shares, and finally $23.25 for the last 200 shares you want to buy. People who want to sell at $23.50 will not be able to sell any of their shares.
Second, by buying back shares on the open market, management is increasing the value of the remaining shareholders that they have (slang) in the company, more often than not they ended up increasing the promoters’ stake in the company, since they control decision-making at the highest level and have better information about the future prospects of the business.
What will happen to Microsoft stock on Wall Street?
Historically, once the company starts to buy back, share prices rise because investors believe the company has something under control.
Personally, I think the range is on the lower side since Microsoft stock is already trading at $24 (Aug 1, 2006) and shareholders have very little incentive to sell their stake in the company.
Looking in terms of yield buyback will increase earnings per share (EPS) and allow investors a higher yield than the current range of $0.26 to $0.37.
The good thing that the repurchase of Microsoft shares will do is that it will increase the support price of the shares on the open market. Based on historical trends and technical charts, that data is less relevant in the present case, as none of the previous companies were as strong as Microsoft is now.
Ultimately, in my opinion, the real winners of this buyback will be those who won’t sell their shares, as tech stocks have technically bottomed out after the beating they’ve taken since April of this year. Second, Microsoft will release its next version of the operating system, Vistas, early next year, which will help improve results.
