Microsoft Corporation Analysis, Coursework Example

Microsoft Background

History

The page of Microsoft’s history goes beyond 1975. However, it is during this year that the organization started the evolution process to what we know today. In this year, Telemetry Systems or MITS and Micro Instrumentation gave the world the first computer, the MITS Altair 8800. It was this occurrence that instigated Paul Allen and Bill Gates, two computer enthusiasts, to start the creation of a novel computer program for the first computer, through the use of released guidelines from MITS. Through Sheer industry day and night, the two computer enthusiasts were able to succeed in developing the first ever version of what came to be the Microsoft BASIC for the first computer. After a successful demonstration before Ed Roberts, the MITS president, by Paul Allen in New Mexico, both Bill Gates and Allen were offered the license to produce the computer software and distribute it. Within the same year, on the 1st of March, Allen and Gates entered the world of MITS as Software Directors, where the partnership was coined as Micro-soft.

Perhaps the greatest invention of all time by Microsoft is Windows software. This was a feature that had the ability to allow computer users to use and apply different applications at the same time, as well as the transfer of data easily. It was software that was easy to use for everybody since the interface was rather uncomplicated. Even further, improvement of windows such as 95, 98, 2000 and the current impeccable 2007 version has enabled the software company to maintain its number one spot globally. Competition and new opportunities in the market have prompted Microsoft to undertake other businesses such that software is no longer their sole business. The company has since ventured into the hardware market and the internet market in order to tap market demand (Microsoft website). Most recently, Microsoft endeavored into the world of online games and entertainment. Notably, Microsoft remains a household name despite the competition and challenges that it has faced along the way.

Competitive position and strategy

Microsoft remains the leading provider of software products; with most computer users making use of the Ms Suite operating system. Microsoft is not only popular among businesses and individuals but is perhaps the most reliable. The company however has not escaped competition; such that there are other companies threatening to invade into its market share. Google remains a major competitor and has a significantly higher capital and profit than Microsoft. The Linux operating system is a great threat for Microsoft because it allows users to enjoy similar benefits at no cost. Microsoft however strives to ensure that its position in the market is maintained. In order to do this, the company dwells on innovation and maintains keen attention on the customers’ needs (Microsoft website). Its diversification strategy has also played a major role in ensuring that the company maintains its position in the market.

Microsoft SWOT Analysis

Strengths

Leader in software applications

Microsoft’s global effect is very vast in the software industry, perhaps the largest, due to the great line of successful software products (windows). The company enjoys over 30 million users as a trustworthy customer base. It also has robust IT brands globally with so many loyal devoted users who are good ambassadors to the Microsoft brand. Through its innovative products, the company has been able to retain existing clients and attract new ones.

Global presence

A great strength of Microsoft as a company is its global presence, with so many major offices within the United States and everywhere around the world, from Europe (such as German, France and United Kingdom) to Asia (Korea and China); where its main customers and avid product users can access the company’s products easily.

Innovation and research

Microsoft dedicates high financial outlays towards innovation and research, with an aim of creating better products to satisfy customer needs and differentiate its products from competitors. This in turn places Microsoft in a class of its own so that it can easily maintain its position in the market.

Diversification

Initially, Microsoft only concentrated on software production. With time, the company has explored the hardware and internet market. More so, the entry of Microsoft into the search engine world has also made it to be significant in the eyes of the Search Engine optimization, where the market is soaring every single minute. The company’s Windows explorer and other interactive gadgets are also strengths, since they are performing well despite the souring competition. The company has been able to diversify its products, into such industries as game designs, publishing, game development and many others such as the Xbox game consoles. Provision of free interactive mails as well as search engine and news services, business documents that are important in organizing ones work station as well as free websites for businesses or to people who are interested. This is very different from a company that was a bit conservative in the approach to the current market.

Employee ownership

It is estimated that $1 million of the company’s stock is owned by Microsoft’s 10,000 regular employees. Such ownership definitely creates a sense of dedication among the employees because they are owners and higher profits would mean that they get more dividends.

Weaknesses

Expensive products

The company’s products are said to be far too expensive for small businesses and individuals. This has to do with the licensing requirements and the high cost of software. This discourages demand and is also responsible for the high level of software pirating witnessed across the world. Users are also turning to affordable operating systems such as Linux even though they are not as effective as Microsoft.

Internet is not Microsoft’s area of expertise

While venturing into the internet business is good for Microsoft, the company cannot be said to be competent. Microsoft faces stiff competition from internet operators who provide better search engines, faster internet and more innovative internet tools.

Dwindling customer support

The software giant lacks in a reliable customer online support, something that has been attributed to increase of bugs and viruses eroding the company’s software, while immediate feedback is highly expected of such a global market leader to easily deal with the rising software menace. This would raise the integrity of the products and company to greater heights, which at the moment really lacks.

Product compatibility and use

Another issue is lack of compatibility of Microsoft’s software and at a greater extent, hardware, with other brands. Since a user’s computer stability is highly threatened by purchasing these products, the company might be on a losing streak. The monopolization of its programming codes make modifications very difficult in case bugs as well as other viruses attack its software, mostly if detected by other programmers who are not affiliates or workers of the company.

Opportunities

Diversity in demand for computer applications

The world is increasingly becoming computerized and users are demanding more sophisticated and diversified applications. This is a factor that Microsoft could use to its own advantage. It seems as the pressure keeps on being applied on the company, lots of innovation and better investment ideas are creating opportunities, mostly in web-based service provision and the production of superior hardware to meet new demand. For example, Microsoft was able to enter the Chinese market through providing the Chinese language programs that give authority to the People’s Republic of China to look at its people’s emails, WebPages and other online documents, enabling the republic to censor any information that was not in the interest of the whole Republic, mostly in such big occasions as the 2008 Beijing Olympics.

Cheaper global communication

Due to cheap communication, the company can open up new customer lines and hence diversify its customer base. Communication also acts as a facilitator to internet use and the ability to handle customer queries and suggestions with ease.

Evolution of a computerized world

It is notable that developing countries are quickly embracing technology, and this has increased the global demand for computers, accessories and programs. The demand for computers has never been higher and Microsoft can tap this opportunity to enhance its performance.

Threats

Competition, piracy and availability of free online programs

The number of software experts has grown and more companies are entering the computer business as years go by. This has increasingly impacted on Microsoft’s previous monopoly position. Examples include hardware producers such as Hewlett Packard, Compaq, Digitek, Dell; and internet competitors such as Google, Yahoo, Mozilla Firefox. Perhaps the chief threat of Microsoft is the Linux program, a well developed operating system found free of charge created by independent programmers, in close following of the company’s success in the world wide software market. The idea is all about finding a level playing field, where one company does not have an upper hand in the world wide global market but to allow other players to share in the spoils. Products being introduced and offered to customers who should be buying the Microsoft’s products pose a great threat to the company’s future profitability.

Threat of reduced profitability

Due to increased competition and the reduction in demand for products, the company may soon have to put up with less profit. The company may also be forced to sell its products at a loss in order to make sales, as a result of the free programs available on the web as well as pirated software. It is not easy for the company to stay at the helm forever, with the ever emerging threats from open programs such as Linux looming in the shadows, a world of diversification and cutthroat competition.

Diversification

While this is considered as an opportunity, the diversification program may also be a threat, where entering markets already having experts in the specified category might make it lose its competitiveness to well established markets. An example is the games market, where amidst making sensible profits; Microsoft might just find itself facing stiff competition more than ever from companies with decades of experience in developing games and other entertainment products. The internet market is not doing well and companies such as Google and Mozilla Firefox are far ahead of Microsoft’s Internet Explorer.

Tarnished image

The company also faces the adverse seeds of tarnished image and exhaustion of finances due to the many legal suits and battles from competitors in the independent company matrix. The lawsuits from across the 50 states in issues of antitrust might make it lose credibility, since the wider public might just see it as a company that is not up to their own good but somehow curtailing services they should be accessing. Monopolies are not exactly the love of the public, since the public is also a part of the business world after making money, and with Microsoft holding all the reigns, it means no investment for them.

Microsoft 5 F Analyses

Bargaining power of suppliers

As a leading software provider, Microsoft is shielded from high bargaining power of suppliers. This is because of its ability to negotiate; given that the suppliers may not want to lose the large income the company provides for them. The amounts of supplies demanded by Microsoft are so high that suppliers would not risk losing Microsoft; such that their bargaining power is significantly reduced. Further, the company buys in bulk and this gives it ability to attract discounts.

Bargaining power of customers

Microsoft’s customers have a low bargaining power in the purchase of computer software. The bargaining power is however high in the purchase of hardware and the demand for internet-related services. The above facts can be attributed to the Microsoft’s dominance in the software market and the high number of competitors in the hardware and internet market respectively. This explains why the company’s software products continue to attract high prices. The bargaining power however is slowly increasing with the introduction of other operating systems. In the hardware and internet market however, customers have a variety to choose from such that their bargaining power is high.

Threat of new entrants

The number of corporations dealing in computer software, hardware and internet provision has increased significantly in the last decade. The same is expected to happen in the future. This can be attributed to the rising demand for computers and related applications as the world quickly becomes computerized. The threat of new entrants is therefore very high. It is possible to predict that a large number of companies will enter the industry in the next decade.

Threat of substitutes

Microsoft has enjoyed absolute market share in software provision for a long period of time. The increase in number of competitors has however increased the threat of substitutes. The new Linux operating system remains a key threat to Microsoft’s Ms Office. The operating system which is available free of charge could ruin the company’s market for good as users rush to acquire the cheaper product. In the hardware and internet market, the threat of substitutes is significantly high. Other companies such as IBM, Hp Compaq, Digitek and Dell among others are undertaking rigorous campaigns which greatly threaten Microsoft’s products. Internet products from Google, Yahoo and Mozilla Firefox are also a major threat

Industry rivalry

There are numerous companies in the industry and industry rivalry can be said to be quite high. Companies such as Netscape, Sun Microsystems, Oracle, Google, Yahoo, IBM, Hp Compaq, Dell, AOL and Apple among others are working tirelessly to increase their market share. AOL, Apple and Oracle for example are putting their own programs in hardwares such that users do not have to purchase the Microsoft software. As companies try to outdo each other, more innovative products are being introduced such that Microsoft must exert extra efforts to ensure that it is not left out.

 Value of Microsoft’s common stock and bonds

Value of common stock using dividend yield

Dividend yield = Annual dividend per share / Share price (Current)

= $0.13 / $30.52

= 0.0043%

Value of bonds using present value

AAA rated corporate bond with a face value of 2,000,000,000 offered in 2009 at 2.95%. The maturity date is 2014. Yield to Maturity at 7.5%.

Financial ratios

Below is an analysis of the Microsoft Corporation using financial ratios. The figures given are expressed in millions of dollars (000,000’s) and are compared to Microsoft’s competitor IBM. Microsoft’s financial year ends on 30^th June while IBM’s financial year ends on 31^st December. For complete calculations see Excel file attached.

Liquidity ratios

Current ratio

Current ratio = Current Assets / Current liabilities

The current ratio falls in the 2007/2008 financial year before rising to 1.823 in the 2008/2009 financial year. This is a positive move, depicting that the company has improved its liquidity position significantly. As compared to Microsoft, IBM’s current ratio is relatively lower ; an indication that Microsoft has a higher liquidity than IBM. Consequently, Microsoft is more credit worthy, given that the ratio of the company’s assets as compared to the liabilities is high.

Quick ratio

Quick ratio = (Current Assets – Inventory) / Current liabilities

Like the current ratio, Microsoft’s quick ratio declines before changing positively in the year 2008/2009. This reflects a positive change in the company’s liquidity. Furthermore, a company is always better off when its current assets exceed the current liabilities. For IBM, the value is significantly lower. The value increases in year 2007 before declining again in 2008. This shows a weaker liquidity position as compared to Microsoft.

Cash ratio

Cash ratio = Cash & CE / Current liabilities

For both companies, the cash ratio increases and then declines in the third years. Microsoft’s ratio however remains higher that IBM’s. Given that the cash ratio is an indication of a company’s ability to make immediate payments on current liabilities, Microsoft is at a better position than IBM. Furthermore, IBM’s cash ratio falls significantly in 2008 raising concern about the company’s liquidity.

Financial leverage ratios

Debt-to-equity ratio

Debt-to-equity ratio = (Current liabilities + Non-Current liabilities) / Owner’s equity

Microsoft’s debt-to-equity ratio is declining systematically. On the other hand, IBM’s debt-to-equity ratio is increasing sharply. This shows that the company is financing growth using more debt as compared to Microsoft. Accordingly, IBM’s earnings are more likely to be fragile than those of Microsoft.

Debt ratio

Debt Ratio = (Current Liabilities + Non-Current Liabilities) / Total Assets

This ratio indicates that Microsoft has a more favorable financial leverage than IBM. This is because they have a higher value of assets as compared to liabilities.

Times Interest Earned

Times Interest Earned (TIE; Interest Expense Coverage) = EBIT / Interest expense

There is a significant difference between Microsoft and IBM in the Times Interest Earned analysis. It is notable that Microsoft did not allocate any amount to interest expenses over the three years. Infinity times therefore show that the company has a limitless ability to handle its debts. While IBM is not badly off, it is at a higher risk with debt than Microsoft.

Efficiency ratios

Inventory turnover

Inventory Turnover = Cost of Goods Sold / Inventory

A high inventory turnover is enviable because it depicts the business’ health. IBM’s inventory turnover is higher meaning that its stock turns over quickly than Microsoft’s. The business can therefore be said to be more health gauging from inventory turnover figures.

Asset turnover

Asset Turnover = Sales / Total Assets

The difference between the asset turnover ratios recorded does not vary over a wide range for the two companies. It is however notable that Microsoft’s turnover ratio is not as high as IBM’s on average. Further, it drops significantly while IBM’s ratio increases. This shows Microsoft’s strength could be declining as compared to IBM.

Receivable turnover

Receivable Turnover = Sales / Accounts Receivable

Microsoft receivable turnover ratio is generally higher than IBM’s; an indication that the company is efficient in managing debts owed by their customers. IBM on the other hand may be slow in ensuring proper collection of debts which may eventually cause huge losses to the company.

Profitability ratios

Return on Equity

Return on Equity, ROE = Net Income / Total Equity

Microsoft’s return on equity can be said to be average. The company is therefore in a position to obtain cash internally with relative ease. This however may not be enough and external borrowing may be required. The same is applicable for IBM. The drastic increase in the return on equity ratio recorded by IBM can be attributed to the increase in income and a significant reduction in total equity.

Return on Assets

Return on Assets, ROA = Net Income /Total Assets

Microsoft records higher returns on assets as compared to IBM which indicates that the latter has more efficient operations than the former.

Net Profit margin

Net Profit Margin = Net Income / Sales

Operating Profit Margin (ROS)     

Operating Profit Margin (ROS) = EBIT / Sales

The profit ratios indicated (net profit margin and operating profit margin clearly show that Microsoft is more efficient and profitable than IBM. This is because their net profit margin and operating profit ratio is quite high as compared to competitor IBM.

Microsoft’s corporate bond

The Microsoft corporate bonds were literally scrambled when they were first introduced, attracting $10 billion in demand upon issue (Wingfield and Varghese, 2009). According to reliable sources, the Microsoft’s corporate bonds were meant to expand the company’s operations in order to revive growth. The finances obtained would apparently be used in acquisitions and in buying back company stocks. $3.75 was issued in debt. The bonds were issued in three parts; $2 billion at 2.95%, maturing on June 1, 2014; $ 1 billion at 4.2 %, maturing on June 1, 2019; and $750 million at 5.2 %, maturing on June 1, 2039. For the purpose of this study, the $ 2 billion bond will be used.

The corporate bond is rated ‘AAA’. This is owed to the company’s high credit ratings. A call feature was not announced during the sale of the bond such that the debtors are likely to recover their full amount upon maturation. The bond will attract 2.95% interest.

Yield to maturity =6.9% (See Excel file)

Common stock characteristic line

The Microsoft Corporation securities returns yield the following characteristic line against the market returns. Calculations are shown in the Excel file.

CAPM, Alpha and Beta

Average weekly returns = 1.5%

Market index = 0.7

Alpha = 1.69

Beta = -0.8

Given that the risk free rate is 0.06%,

CAPM = -1.21% (See calculations in Excel file)

Correlation coefficient

The correlation coefficient is 1. (See calculation on excel file)

The interpretation for this figure is that as Microsoft’s share value moves, either in a positive or negative trend, the S&P500 values move in the same direction. This is because the correlation coefficient is perfect positive such that the securities move in a lockstep.

Microsoft’s Dividend Model

Microsoft uses the multiple increases dividend model to issue dividends to the stockholders. This has been the case since the year 2004 when the company issued its first dividends. The board of governors is responsible for setting up the dividend rates. The dividends recorded by the company have been rising steadily although the rates are not exactly attractive.

Year 2006/2007

In the year 2006/2007, the company gave $0.09 in the first quarter of the year. This was later followed by $0.10 in the second, third and fourth quarters. In the first quarter, the announcement data for the dividends was September 13, 2006. The Ex-dividend date was November 14, 2006 and the payment date was set for, December 14, 2006. The dividend rate announced was the same as the one recorded in the fourth quarter of 2005 such that there was no change in the dividend paid. In the second quarter of 2006/2007, the announcement date was December 20, 2006. The ex-dividend date was February 13, 2007 while the payment date was March 8, 2007. The dividend payouts were announced on March 26, 2007 for the third quarter of the year. The ex-dividend date was May 15, 2007 while the payment date was set for June 14, 2007. In the fourth quarter, the announcement date was June 27, 2007. The ex-dividend date and the payment date were set for August 14, 2007 and September 13, 2007 respectively.

Year 2007/2008

The divided rose slightly to $0.11 in the first quarter and remained constant throughout the year. In the first quarter, the announcement date was September 12, 2007. The ex-dividend date was November 13, 2007 while the payment date was on December 13, 2007. The second quarter’s dividends were announced on December 19, 2007. This was followed by the ex-dividend date on February 19, 2008 and the payment date set for March 13, 2008. In the third quarter, the announcement date was March 17, 2008. The ex-dividend date was May 13, 2008 while the payment date was June 12, 2008. In the last quarter of the financial year, Microsoft announced the dividend rate on June 11, 2008. The ex-dividend date was June 19, 2008 while the payment date was September 11, 2008.

Year 2008/2009

The dividend rate for the company increased from $0.11 in the previous year to $0.13 in the first quarter of the year. This rate was maintained in the other three quarters of the year. In the first quarter, the dividends were announced on September 22, 2008. The ex-dividend date was November 18, 2008 while the payment date was December 10, 2008. The second quarter’s dividend rate was announced on December 10, 2008. The ex-dividend date was February 17, 2009 while the payment date was March 12, 2009. In the third quarter, the dividend was announced on March 9, 2009. The ex-dividend date was May 19, 2009 while the payment date was June 18, 2009. For the third quarter, the dividend was announced on June 10, 2009. The ex-dividend date was August 18, 2009 while the payment date was September 10, 2009.

Microsoft stock as a potential for investment

For every form of stocks, it is important for the investor to consider the trend in the company’s share prices. Other factors including expected returns and the performance of competitors are also very important. This is because this could be an indication of the company’s probability of survival. Microsoft share prices recorded a decline in the past years. The figure has however started to increase in the year 2009. Notably, the company has been going through intense competition that could have impacted on its stocks in the past three years. The recent trends in Microsoft’s stock are encouraging considering the drop witnessed previously. This could be an indication that the prices may continue to rise. It is however notable that the weekly prices fluctuate highly; an indication that the corporation’s shares cannot be predicted. It is also notable that the security’s Beta is less than 1. A value that is more than one indicates that the security is quite volatile as compared to the market. Investing in Microsoft’s shares therefore cannot be considered to be a risky undertaking. It is possible for an investor to assume that the company’s shares will not lead to losses. The increase in competition requires an investor to be careful about Microsoft’s shares. Notably, the company is no longer as dominant as before and is expected to lose a larger market share to competitors in the future. This means that the company’s profitability is under threat. Investors may invest in the company’s shares but they should not anticipate high returns as would be possible with companies such as Google. While Microsoft’s shares may not be risky to partake, the returns expected from the shares may not promise much to an investor.

References

Microsoft Corp. website. Available at www.microsoft.com

Money Central. (2009). Microsoft Corp price history. Retrieved December 18, 2009 from http://moneycentral.msn.com/investor/charts/chartdl.aspx?PT=7&compsyms=&CB=1&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&CP=1&C5=1&C5D=2&C6=2009&C7=12&C7D=18&C8=2009&C9=1&CF=0&D9=1&D7=&D6=&showchartbt=Redraw+chart&symbol=MSFT&nocookie=1&SZ=0

TFC Commodity Charts. (2009). S&P 500 (SP, CME) weekly price chart. Retrieved December 18, 2009 from http://tfc-charts.w2d.com/chart/SP/W/?saveprefs=t&xshowdata=t&xCharttype=b&xhide_specs=f&xhide_analysis=f&xhide_survey=f&xhide_news=f

Wingfield, N & Varghese, R. (2009). Cash-Rich Microsoft sells its first bonds. Retrieved December 19, 2009 from http://online.wsj.com/article/SB124205546206507039.html