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Wednesday, July 21, 2004

Microsoft pays the biggest dividend ever 

By a long shot.

This afternoon after the market closed, Microsoft announced that it would distribute $75 billion -- that's $75,000,000,000 -- to its stockholders over the next four years. The distributions will include a one-time $3 per share dividend, a doubling of the now routine annual dividend, and a huge share repurchase program. I believe I'm correct that no similar program has ever gotten close to this size, at least not in nominal dollars. It would be interesting if somebody smart would use the vast resources at his disposal to figure out whether there have been larger non-liquidating distributions measured in constant dollars.

Amazingly, the blogosphere seems to be silent on this story, probably because they can't get enough of Bergergate. Too bad, because this is huge news.

Herewith, a few TigerHawk comments and predictions.

First, it will be a big boost to the stockmarket, particularly the liquid tech companies. Why? Because a flood of new money will be coursing through the system, and it will get reinvested somewhere.

Second, in a couple of years we will see that Microsoft has started another trend. Nobody else can be as dramatic as Microsoft because nobody else has more than $60 billion in cash on hand. But now stockholders will have a precedent to cite to companies that are sitting on huge piles of cash -- if Microsoft can figure out how to distribute it after years of hoarding their money, then so can Cisco, Pfizer, and any number of other companies with lots of cash. And directors, who generally want to do what other people do, will feel more comfortable distributing significant cash to stockholders.

Third, corporate governance fetishists will applaud this. They will say that it is better that corporations distribute their surplus cash than blow it on management compensation or ill-considered acquisitions. There is a certain minimalist truth to this idea, although it is probably better applied to companies other than Microsoft.

Fourth, this will improve Microsoft's chances of fending off anti-trust prosecutions. Microsoft's huge cash hoard makes it scarier to people with regulatory urges. Once that hoard goes away, it is harder to fulminate against its corporate power.

Fifth, some people have argued that federal corporate tax law required Microsoft to distribute some of its cash (can't remember the rationale). That argument goes away.

Sixth, paradoxically, Microsoft is going to become an even scarier competitor in the software business. Why? Because it will no longer be able to acquire its way out of innovation crisis, either by diversification into non-software businesses or by buying competitors. Now it will have to innovate. This distribution may change Microsoft's culture.

Seventh, I believe this was in the works for some time. Big dividends are bad news for holders of options (the higher a dividend, the less valuable an option to buy the underlying stock), but neutral to good news for stockholders. Remember that Microsoft swapped its employees out of their options and into restricted stock last year. We now know that that transaction paved the way for this mammoth distribution.

I have more thoughts, but I'm tired so I will offer only this parting shot:

Eighth, if you own MSFT, don't spend it all in one place.

UPDATE (9:20 AM, 7-21): Tyler Cowen has more, asking inter alia whether Microsoft is signalling that it believes John Kerry will win.

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