Despite Yahoo silliness, Microsoft holds its ground

Dear Mr. Berko:

Way back in late 2008, when Microsoft offered $35 for Yahoo, you told me not to buy Microsoft stock. But I bought 200 shares at $21. Now I hear that Microsoft might consider buying Yahoo once again.

Please tell me if you think Microsoft will buy Yahoo and if you think Microsoft might be a good buy at the current $30 price today. I may not follow your advice, but I respect your opinion.

GK, Gainesville, Fla.

Dear GK:

There was a time a few years back that Microsoft (MSFT-$31) considered purchasing Yahoo (YHOO-$15), and at that time, it would have been a disaster. The cultures of the two companies (YHOO has none) are as different as cheese and chalk, and fortunately for MSFT, Jerry Yang (YHOO's ex-CEO and founder) nixed MSFT's $48 billion offer in 2008.

But for that, MSFT's Steve Ballmer would be pulling out what remains of his hair working with Yang, whose personality spans five octaves. Now that YHOO's current market value is $18 billion, Yang's astrologer encouraged him to resign, and certainly the sycophants on the board also see the signs.

Since Yang flapped his wings and flew the coop, MSFT could score a coup and buy YHOO for $25 billion less than it would have paid four years ago. Microsoft can't just mosey along, protecting its $59 billion in cash reserves, while Apple, Google and Facebook steal the applause. For all of YHOO's troubles, including a gormless board of directors with a median IQ of 62, YHOO "is still a stunning group of Internet assets, with a massive reach of almost 700 million unique users," according to the Wall Street Journal MarketWatch.

Frankly, Ballmer needs to get the pennies off his eyes and make a bold move because he can't afford to let someone else buy YHOO. The failed 2008 merger encouraged YHOO to work a deal that made MSFT's Bing the search engine for all of YHOO's sites. MSFT needs the traffic from its YHOO connection, and a merger with another company would ruin the search partnership, which is something MSFT does not want to lose.

I became disenchanted with MSFT during the ongoing "tech wreck" in 2000, when the shares were trading on a split adjusted basis in the mid-$50s. There were 10.5 billion shares outstanding; revenues were $21 billion; book value was $4; earnings were 84 cents a share; return on shareholder's equity was 21 percent; and the stock traded at (hold your nose) 65 times earnings. Since then, management has repurchased 2.5 billion shares; book value has doubled; earnings have tripled; return on shareholders' equity has doubled; and the MSFT dividend has zoomed to 80 cents a share, yielding 2.7 percent.

So for the first time in over a dozen years, I would encourage you to buy MSFT. There's very little downside from here and lots of upside in the shares, but it'll never trade at 65 times earnings again.

In the past, those who were recommending the stock were tilting at windmills. Not now! Consider MSFT's double-digit earnings growth, its $23 billion in free cash flow, its $59 billion in cash horde, its huge installed base of 350 million Windows 7 licensees, and its 750 million users of Microsoft Office software. And the dividend, which increased five-fold since inception, could possibly double in the coming four years.

But the real juice should derive from Windows 8 (it'll be out in October), which surprisingly created an enormous buzz at the recent International Consumer Electronics Show. Windows 8 will drive sales of a new breed of super-lightweight laptops with touchscreens powered by the next-generation Intel chips.

I think MSFT could trade in the low $60s by 2016, and the dividend could rise to $1.40 a share. Flip a coin--heads you buy it, and tails, I would too.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at

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Published: Fri, Mar 2, 2012