Monday, January 17, 2005

McKinsey Quarterly Interview with Microsoft's CFO

McKinsey Quartely has a great interview with John Conners the CFO of Microsoft.

Conners lays out why the firm changed its financial reporting, why it both paid a large one time dividend and initiated a buyback plan, and why the firm now uses restricted shares instead of stock options. HIGHLY RECOMMENDED!

A few highlights:

  • "...we decided against a huge buyback....Our analysis also showed that if we had committed ourselves to a $60 billion share buyback, we could have ended up purchasing 5 to 8 percent of our stock every day that the Nasdaq allows us to buy our own shares for the next three years, and some of that inevitably would have been uneconomic. So we decided to take that $60 billion and use roughly half of it for a special onetime dividend, with the rest committed to a multiyear buyback"

On a question as to whether tech firms will begin to use more leverage:

  • "For start-ups, the last thing in the world a company like Google is worried about right now is whether or not it should have debt....I don't see why the Wall Street analysis of midsize and large tech companies would be different from that of companies in other industries five or ten years from now. So if the market starts to measure technology in terms of returns on equity, capital, and assets, you will probably see more financial engineering of technology companies to bring them in line with companies in other industries."
Conners also discusses the reporting change (Microsoft now reports financials for each of 7 business units) and the benefits that have accrued from the change.
  • "One of the most positive outcomes is the transparency the reorganization created"
  • "The P&L focus also forced some improvements in resource allocation"
  • "It was surprising how many people within the company didn't really understand how intensely analysts, investors, and the press would follow each of these seven businesses."
  • "It has allowed us to push much harder on performance "

On Sarbanes-Oxley:

"Of course, there are negatives in Sarbanes-Oxley. For example, there isn't much guidance on what is material for public-company financial statements—not in the legislation itself or in the regulations or rules yet—nor is there any case law defining this. There are far too many areas where companies could take a reasonable risk with good business judgment but still be subject to litigation.

Yet there are real benefits to Sarbanes-Oxley. In our case, we knew what our key controls were, we knew what our materiality threshold was, we had tight budgeting and close processes and strong internal and external audits, but we didn't document everything in the way that Sarbanes-Oxley legislation requires. So we have done a complete business-process map of every transaction flow that affects the financials. In so doing, we have improved our revenue and procurement processes, and we can use controls to run the company in a more disciplined way. So we have gotten real business value out of all that process documentation."

Microsoft has now gone to granting restricted shares rather than options to its employees. In large part to end the worry about strike prices in a volatile market. His comments on the former plan:
  • "The options program was originally designed to give employees enough money for retirement or a vacation home or to pay for their kids' education—goals that usually take 15 or 20 or 25 years to achieve. Yet because of the stock performance, people were making enough money to send 3,000 kids to college or build 30 vacation homes."

Good stuff! I would definitely recommend it!

The article/interview is by Bertil Chappuisis and Tim Koller.

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