You really have to feel sorry for ex-Microsoft CEO Steve Ballmer. The poor guy has clearly let 14 years being the CEO of a major U.S. corporation and a multi-billionaire go to his head. I mean last year he pays $2 billion for a basketball team worth barely over $1 billion, and now it turns out he overpaid for Nokia by about $7.6 billion of the $8 billion price tag in one of his last major decisions at Microsoft.
Yeah, Steve, in case you hadn’t figured it out yet, that guy glaring at you from the tenth row and the old lady on the other side of the court at Staples Center that’s holding the sign “Stevie Sucks”, they’re ticked-off Microsoft shareholders.
Microsoft announced in a conference call on Wednesday, July 8th that it was taking an impairment charge of $7.6 bil for the Nokia business and an additional $750-850 mil restructuring charge (probably a cash charge to be recognized in 2QFY16/4QCY15). The company also announced a little over three weeks ago that the ex-CEO of Nokia Stephen Elop would be leaving, with Nokia being folded into the new Windows and Devices group under executive VP Terry Myerson.
| Adjusted Nokia Gross Margins – Amortization of Acquired Intangibles (USD in millions) | ||||||
| Sep-14 | Dec-14 | Mar-15 | Jun-15E FY | 2016E FY | 2017E | |
| Total Revenue-Nokia Devices | $2,609 | $2,284 | $1,397 | $1,351 | $5,388 | $4,536 |
| Cost of Goods Sold | $2,131 | $1,953 | $1,401 | $1,351 | $4,822 | $3,796 |
| Gross Profit | $478 | $331 | ($4) | $0 | $566 | $740 |
| Gross Margin % | 18.3% | 14.50% | -0.30% | 0.00% | 10.50% | 16.30% |
| Amortization of Intangibles | $125 | $104 | $132 | $120 | $482 | $482 |
| Adj. Gross Profit | $603 | $435 | $128 | $120 | $1,048 | $1,222 |
| Adj. Gross Margin % | 23.10% | 19.00% | 9.20% | 8.9% | 19.50% | 26.90% |
| Nokia Gross Margin | 479 bps | 453 bps | 947 bps | 891 bps | 895 bps | 1064 bps |
Note: We assume amortization will be reduced by 90% post write-down. Source: Company data, Nomura estimates
Analysts slam Microsoft’s history of failed acquisitions
A number of analysts have slammed Microsoft for their long history of failed acquisitions. A July 9th report from Jefferies Equity Research argues Microsoft management has flushed close to $24 billion of shareholder cash down the drain in just four recent acquisitions (including Nokia).
For example, Fast Search was purchased by MSFT for $1.3 billion back in April 2008, and a chunk of the business was sold a year and a half later for an undisclosed price. It should be noted that some of Fast’s technology was used in upgrading the Bing search engine, but it seems unlikely that Microsoft made much if any money on the deal.
Microsoft also acquired aQuantive in the summer of 2007 for $6.3 billion to try and grow its digital advertising business. However, the company basically wrote off the entire purchase price five years later 2012 and eventually sold the business to Facebook for a small fraction of the original price. While the software giant did not disclose the final sale price, the firm wrote down $6.2 billion of goodwill in the former Online Services Division to a mere $223 million. Given there is no mention of a gain on sale following the write down, the gain was either immaterial or nonexistent. Assuming that Facebook only paid $223 million, MSFT lost 96% on the deal.
The purchase of online phone service Skype was another Ballmer boo boo. In specific, Microsoft paid $9 billion for Skype back in October of 2011. The firm has not offered further details on the business for several years. The Jefferies analysts admit it is difficult to accurately judge this acquisition given the “meaningful strategic value”, but the deal certainly has not added to the company’s bottom line.
Restructuring and additional layoffs
As Frederick Grieb and Aasiv Shah of Nomura Golbal Markets Research point out in a July 8th report, Microsoft announced a further restructuring of its
business along with the Nokia write down.
The firm laid out a new plan to eliminate 7800 jobs in their Wednesday conference call. The analysts highlight this reduction in force is in addition to the 18,000 layoffs announced last year after the Nokia acquisition. Not surprisingly, the RIF will largely come from the Nokia business, with the employee headcount now dropping to below 10,000 in the phone division, from 25,000 at the time of the Nokia deal. Most of the layoffs will be be finalized by the end of the current calendar year.
Grieb and Shah say they see the layoff announcement “as an incremental positive, with CEO Satya Nadella making tough choices (as indicated in his late-June memo) and having the company refocus on its core business of platforms and productivity.”
Current analyst ratings on Microsoft
Equity analyst John DiFucci and colleagues at Jefferies rate Microsoft as Underperform, and give the stock a price target of $39. Michael Turits and team at Raymond James rate Microsoft as Market Perform 3. Grieb and Shah at Nomura have a much more positive view on the software giant, with a Buy rating and a lofty price target of $55.
