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By my financially oriented methods, MSFT is worth 40 per share. The company has shown steady growth of revenue and EPS for many years. Margins are ample, and 5 year growth of Revenue and EPS are both in double digits. I think it is also relevent to look at their R&D (12.8% of Revenue) and Sales&Marketing (19.8% of Revenue) as discretionary uses of their Cash Flow - MSFT has huge resources to achieve growth by developing new products, improving existing products, and marketing to appropriate audiences. Their 5 year record of 12.5% compound annual growth in revenues would argue on the face of it that the money has been well spent.
I would qualify that opinion by referring the Keith Barton's take on MSFT http://www.investorplaceblogs.com/users/kbarton10/. VISTA is nothing to rave about, according to my daughter, who uses it. Somehow I wind up paying over and over again to stay current with Office applications, not something I appreciate. Keith's comparison to IBM is apt, MSFT may slowly squander its advantages, steadily diminishing in creativity, while the share price languishes. Often I find that when an outfit with a huge R&D budget starts buying other businesses it is because they aren't getting it done in house - I have seen that in Pharmaceuticals and BioTech. A parallel observation could be made on the Sales and Marketing, why should they have to buy the competition when they have substantial resources to develop business on their own?
Looking at Yahoo, my methods show a value of 19 per share. I shorted it a few years ago and made a little bit of money. If MSFT wants to overpay for it, at 31 per share, my only concern would be whether the overpayment was material to MSFTs share value. The way I did the math, MSFT is worth 39 per share after they buy YHOO, a decrease of 1 dollar, not really material. I would note that YHOO also spends 14.6% of revenue on R&D and 19.3% on Sales and Marketing. If there are any synergies or cost-savings here, and it almost seems like there would have to be a fair amount, then YHOO is worth more to MSFT than it is to its shareholders as a stand-alone company. It may also be worth more to MSFT than it is to anybody else.
I was looking at AAPL the other day, and I was surprised at how much they increased sales of computers, to include their proprietary operating systems. Linux and Unix are still out there. There are alternatives to Office. I think the proposed buy of YHOO is a confession by MSFT that they have not been getting full value on their R&D and Sales & Marketing, which suggests that management is not making fully effective use of their huge cash flow resources. Google dominates the search business, and I would question whether MSFT buying YHOO, which is weakening, will change GOOG's status.
Taking all of this together, I am lukewarm on MSFT and the prospect of the YHOO acquisition doesn't change my opinion. YHOO shares are now trading at a premium and I see no reason to get involved.
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