Microsoft sees stock dip as time for buyback It owes employees options on about $30 billion worth of stock it doesn't own


December 31, 1997|By SEATTLE TIMES

The recent drop in Microsoft Corp.'s stock price may have rattled some investors, but it has been good news for one of the biggest purchasers of the company's stock: Microsoft.

Microsoft owes its employees about $30 billion worth of stock the software company doesn't currently own, and any drop in price is welcomed as an opportunity to buy.

The stock owed is in the form of options, which Microsoft uses as a substitute for higher salaries and cash bonuses to attract some of the sharpest minds in the industry.

Stock options are basically rights to buy shares at a predetermined price over a set period of time, regardless of the market price.

If an employee, for instance, had options to buy Microsoft stock at $85 a share, and exercised those options today, he or she could buy the stock from Microsoft and resell it for about $130 a share.

Employees are typically given a number of stock options when they are hired, and more as bonuses later on.

Since most employees hold on to their options hoping the price will rise, there's little chance Microsoft would have to come up with $30 billion in stock all at once.

Nevertheless, traders working for Microsoft often pounce on any significant drop in the price to shore up the company's reserves.

From a near-52-week high of $146 a share Dec. 8, Microsoft stock dipped to $118 Dec. 24 before rebounding somewhat. It closed yesterday at $130.25, up $3.9375.

That's still an impressive performance for the year, considering Microsoft stock traded at $81.625 Jan. 2, 1997.

Analysts say the drop can be blamed on economic woes in Asia, the continuing battle between Microsoft and the Justice Department, and Wall Street's ambivalence toward technology companies.

In its legal battle, Microsoft won an expedited hearing yesterday on its appeal of a preliminary injunction in the U.S. Court of Appeals for the District of Columbia.

U.S. District Judge Thomas Penfield Jackson issued the injunction Dec. 11, ruling, in a lawsuit filed by the Department of ,, Justice, that Microsoft may not force computer makers to purchase its Internet Explorer browser along with its Windows 95 operating system.

The court ordered written motions and replies to be submitted by March 9. No date for oral argument was set.

Whatever the reason for Microsoft's stock price drop, the company almost certainly saw the slide as a buying opportunity.

Because Microsoft buys its stock through different brokerages, there's no way to know when it is entering the market or how much it is buying until it files information with the Securities and Exchange Commission in February.

But, considering that Microsoft stock doesn't stay down long, Scott McAdams, an analyst with the Seattle brokerage firm Ragen MacKenzie, said he wouldn't be surprised if Microsoft was gobbling more stock than usual.

"They have an ongoing appetite; they've bought back shares every quarter they've been in business. And like everybody else, they'd rather buy cheap," he said.

During conference calls with analysts and reporters last summer, company executives said Microsoft stock was overvalued -- statements some say were aimed at lowering expectations and cooling the market.

In a September filing with the SEC, Microsoft indicated it would use part of its $9 billion in cash reserves to finance an increased stock buy-back program in 1998.

In its last quarterly report Sept. 30, the company disclosed that it repurchased 2.1 million shares from July through September. It also entered into an agreement with investors to repurchase shares when they reach the $123-$129 range.

Microsoft officials refused comment on the company's repurchasing strategies, but spokesman John Pinette said one reason the company keeps big cash reserves is to repurchase stock for its options program.

"Options are one of the key elements of our success. People have a sense that what they are doing is personally important," he said.

The enormous number of outstanding options isn't cause for concern, McAdams added. It simply means the company is using its soaring stock price to hire the best and brightest, and continue its dominance of the global software market.

"They hire the best people around and motivate them with stock options. I think the [Wall] Street understands that," he said.

But having $30 billion in outstanding options is something Microsoft can't ignore.

So far, the company has chosen to repurchase stock instead of issuing more shares -- an alternative most companies don't like to use. Issuing more stock dilutes the value of the shares already held by investors and employees.

"Microsoft has been able to motivate people with stock options. If the stock price doesn't perform, then it's meaningless," said Rob Owens, an analyst who follows Microsoft for Pacific Crest Securities in Portland, Ore.

Pub Date: 12/31/97

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