How Microsoft Can Avoid the HPQ Trap

By Eric Jackson
RealMoney Contributor
9/2/2010 5:00 PM EDT
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Earlier this week, Hewlett Packard's (HPQ - commentary - Trade Now) board announced it was undertaking a $10 billion stock buyback. It plans on spending $3 billion of that this quarter. It only has $14-15 billion in cash on its balance sheet. And don't forget, it has just snatched 3Par (PAR - commentary -Trade Now) from the jaws of Dell (DELL - commentary - Trade Now) for $2.4 billion.

Investors cheered the news of the buyback. On the day of the announcement, an otherwise dismal trading day (unlike yesterday), HP was the only positive stock in the entire S&P 500. Wouldn't this suggest that buybacks are a great way to increase shareholder value? Well, to answer that question, in my view, you have to ask: great as opposed to what?

Of course, HP's decision to spend a big wad of its cash on buying its own stock is much better than what it was doing previously, namely:

Nothing, letting cash accumulate on its balance sheet, and

Trying to buy a company at a 200% premium.

Buybacks are also preferable to paying an enormous one-shot dividend to shareholders, as Microsoft(MSFT - commentary - Trade Now) famously did a few years ago when it shelled out over $3 a share. Why should shareholders hold on to a company's shares after they've gotten their lottery-ticket bonus? Should they hang around and hope that the lucky lightning will strike twice?

A much preferable alternative, which HP should have considered -- and which Microsoft's board still has the chance of choosing -- is to dramatically increase the regular quarterly dividend. What am I talking about? Isn't this all financial engineering? Stock buybacks versus dividends? Next, surely, I'm going to be talking about Modigliani and Miller and ideal capital structure?

Well, that is mostly likely the reaction of Microsoft chief Steve Ballmer and many senior executives at S&P 500 companies when this topic comes up. I'm sure Steve Ballmer becomes more frustrated than most on this topic, because he must believe that he's tried to do the right thing in the past to appease shareholders -- that famous one-time dividend and many buybacks and dividends -- and it hasn't worked.

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Too Much Cash on Hand

By Eric Jackson
RealMoney Contributor
8/31/2010 7:45 AM EDT
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I've been asked by several people over the past week what I think of the battle going on for 3Par (PAR -commentary - Trade Now) between Dell (DELL - commentary - Trade Now) and Hewlett-Packard (HPQ -commentary - Trade Now). I'm convinced that it's a great thing for 3Par shareholders and equally convinced it will be a bust for the shareholders of the company that wins 3Par. Even for the losing shareholders, the whole battle is likely a sign of trouble ahead for their company.

Let's face it: A month ago, few of us knew that 3Par existed. I remember the company from a decade ago doing data storage up in Seattle. That was about it. I didn't even know it was still around -- let alone that the company would be so sought after.

Most of the market was in my camp, which is why the stock was trading around $10. In the days after Dell's $18 bid for 3Par, there were snickers about the steep price they were paying -- a whopping 80% premium, which made Intel's(INTC - commentary - Trade Now) recent take-out of McAfee (MFE - commentary - Trade Now) at a 60% premium seem like a bargain.

That 80% premium for 3Par has turned into a 200% premium with HP's most recent bid. Most of us don't know too many 200% bids, so we have no basis for comparison. We do know, however, that most 50%-plus premium acquisitions end up destroying value at the acquiring firm.

I don't know 3Par's product offering in depth, but it seems clear that Dell is motivated to do the deal in order to beef up its storage offering to compete with International Business Machines (IBM - commentary -Trade Now), EMC Corporation (EMC - commentary - Trade Now) and Hewlett-Packard, while HP is trying to keep Dell on the outside looking in.

Some have said that 3Par is a "pimple" for both HP and Dell, meaning that the company is so small that it doesn't matter that each is paying so much. That's really not true. They've both got 3Par up to a $2 billion market cap, giving it a cool 236x enterprise value-to-EBITDA ratio. That's not insignificant for a $90 billion HP and a much smaller $23 billion Dell. Also, remember that HP has only $14 billion of cash and Dell has $12 billion of cash. 3Par will be meaningfully dilutive to whichever company wins.

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Intel Is Desperate for Growth

By Eric Jackson, Senior Contributor08/19/10 - 10:54 AM EDT

Stock quotes in this article:INTC, MFE, SYMC, MSFT, ORCL,GOOG

This morning's announcement that Intel(INTC) will purchaseMcAfee(MFE) for $48 -- a 60% premium over yesterday's close -- is a bit of a head-scratcher.

It's hard to understand the logic for why a chip company needs to own a pure-play software company protecting PCs from viruses. There has been speculation before about which companies eventually might swoop in and buy either McAfee or Symantec(SYMC), but it was usually other big software companies -- names like Microsoft(MSFT), IBM(IBM), orOracle(ORCL) were commonly mentioned. Even Google(GOOG) has been mentioned as they have tried to build up their Google Apps offering to more seriously compete against Microsoft.

To my knowledge, no one has ever mentioned Intel before as a potential buyer.

So, why are they doing it?

1. They have the cash. In their most recent quarter, they had more than $18 billion in cash burning a hole in their jeans. And, remember, this is atech company that's paying a decent forward dividend yield north of 3%.

2. They want to show more growth. This is likely more important in the eyes of Intel. This big-chip company's future success as a stock is based on its ability to continue to grow its top-line. With the PC market potentially set to take a pause, Intel's growth story is imperiled. Therefore, why not grab a high-margin software business that's running in a duopoly to pad the numbers.

I don't think it makes much strategic sense. It's likely that McAfee will be a bolt-on acquisition, where the stand-alone subsidiary continues to operate as it did as a stand-alone business with very little synergies with their new parent.

In fact, we might want to pencil in to our calendars five years from now, when Intel will likely spin-out the former McAfee division to "increase shareholder value."

So, this purchase is about Intel's desperation. But, more important in my eyes, is how this move might signal that many of those other large companies mentioned above might also start to act/react in the same way to the same problem.

We've talked about the living dead tech companies that are small and have no future without getting bought. We've also talked about all the cash the biggest companies have been stock-piling over the past couple of years. Yet, there hasn't yet been a big M&A consolidation.

We thought Oracle was going to lead the charge, but even they have cooled off of late. We could finally be ready to see some moves -- and they could be big and stupid moves like Intel's today.

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Microsoft Should Stop Acting Like a "Cougar" & Start Paying a Fat Dividend

Yesterday, I was on CNBC's Fast Money discussing why Microsoft (MSFT) should stop acting like a "cougar" pretending it's still a growth company and start paying a fatter dividend:

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