Business Insider had an interesting article today entitled "Cash Cow Disease: The Cognitive Decline of Microsoft and Google" which was also picked up in some of the finance blogs. In the article BI states:
"Cash cow disease arises when a public company has a small number of products that generate the lion's share of profits, but lacks the discipline to return those profits to the shareholders."
Google and Microsoft are cited as two companies suffering from "cash cow disease". Each company gets a significant portion of revenue from one or two products and instead of returning excess cash to shareholders, they have squandered significant sums on failed new product introductions and acquisitions according to BI. Some commentators have gone so far as to say that Microsoft should be broken up into several different companies based on lines of business in order to realize its full value (which is understated do to losses in certain lines of business).
While I am all for shareholder returns and improving return on assets, I disagree with BI for the following reasons:
- A public company should only produce the performance and levels of return that the shareholders expect and reinvest any excess cash flow in future growth opportunities; as long as the shareholders are satisfied as evidenced by an appropriate appreciation in stock price, concerns about excess cash are nonsense
- Both Microsoft and Google need cash to make strategic acquisitions in order to remain competitive and to fund internal development of new products and lines of business; criticizing Google and Microsoft for failures in both areas is really to criticize management for their lack of expertise in integrating acquisitions or in their ability to identify new market opportunities; again excess cash has nothing to do with the analysis
- Google publicly states that they let the market (consumers) decide if new product ideas are viable, as stated in this previous post; Google only expects 1 in 90 new ideas to succeed and that ratio is presumably priced into the stock
When one looks at the comparative stock performance of Google and Microsoft over the last five years (shown below) one sees two very different results, which might suggest that to lump Google and Microsoft together is questionable. Google's stock price has appreciated over 400% but Microsoft has shown little increase in value. The market appears to be endorsing Google's management and their strategy and to be skeptical (at best) about Microsoft's future performance under current management (with the current strategy). The market appears to be ignoring "surplus cash" in both cases and I would also.
Eventually I need to write a post on what Microsoft's strategy should be (in response to several reader requests), but for today I will limit my remarks to a reply to BI.
Another take on the BI story is here. Less financial and more strategic.