Microsoft (MSFT) said it plans to make its first bond offering to raise an expected $3.75 billion. The move is extremely odd since the world’s largest software company has $25 billion and no debt. Net cash from operations was more than$6 billion last quarter, so the cash balance is growing quickly.

The rumors are swirling about Microsoft’s plans for the money, most centered on possible acquisitions. The most widely discussed deals are a partnership with Yahoo! (YHOO) or a buyout of SAP (SAP), one of the top enterprise software companies in the world. Yahoo! says it might like an advertising partnership with Microsoft. Microsoft says it does not want to own Yahoo!.  SAP has a market cap of $48 billion, but putting the two companies together would cause antitrust investigations in the US and Europe.  Microsoft’s track record with the regulatory groups that would handle those investigations has been extremely poor.

If M&A is not the reason for raising the capital, investors are left with a mystery.

On July 20, 2004 Microsoft paid out a special dividend of $3 a share which added up to a distribution of over $30 billion to stockholders. Management and the board also set an $.08 a share quarterly dividend and committed to a share buyback of as much as $30 billion.

For shareholders who buy Microsoft stock to make money when it goes up, none of those plans to return value to shareholders has been of much comfort. Late in 2004, Microsoft’s shares traded at $30. So far in 2009, they have rarely been above $20.

Microsoft’s management would say that its grand plan for the company’s growth has been working. That is not true. While the firm has done a reasonable job maintaining its huge market shares in PC, business, and server software and has kept margins in those businesses that are the envy of the software industry, it has persisted in its expensive habit of wandering off into technology sectors that have cost the company tens of billions of dollars in the development and marketing of products that produce very little revenue.

Microsoft’s financial statements over the last five years make one thing very clear. Earnings have been undermined by company spending outside its core software franchises. Online operations and efforts to be a dominant force in gaming and multimedia players have not yielded the company anything either financially or strategically.

In the first calendar quarter of this year, Microsoft made $4.4 billion on $13.6 billion in revenue, a 33% margin. If the company was only in its core software businesses, its revenue would have been almost $11.4 billion. Operating income from those divisions was about $5 billion, a margin of 44%. Microsoft’s software operations have far less risk of losing money and taking up resources which will never yield a return than its game or internet businesses do.  What would a “software only” version of Microsoft Corporation be worth? Thirty dollars a share would not be an outrageous estimate. That would give Microsoft a market cap which would be $86 billion more than it is today.

To a great extent what is fair in business is what is legal. Microsoft has no obligation to distribute cash back to its shareholders.  But, what is right is entirely different. If Microsoft wants to continue years-long experiments in operations that have not yielded any return, those who hold stock in the company should receive some compensation. A cynic in realist’s clothing would argue that shareholders who do not like what Microsoft does should sell and not complain. The counter to that is that Microsoft has known that it has been in several non-productive businesses for years and that should not cause the endless suffering of shareholders or a sale of stock by investors who believe that the company could be a good steward of its own prospects.

Microsoft has a chance to make things right with shareholders and it has the means to do so. Some of the capital set aside for ongoing and expensive experimentation should be sent back to shareholders even if it is only as a matter of conscience

Douglas A. McIntyre

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