Tender offer falls short, Microsoft ups buyback

Microsoft's plan to take $20 billion in stock off the market in one large chunk fell short as few investors appeared willing to sell at the designated $24.75 per share price. But the company said Friday it plans to make up the difference through a longer-term stock buyback program it announced last month.

The developments sent Microsoft shares on a 4.4 percent upward spike Friday.

Under the July plan, Microsoft made a tender offer to purchase up to $20 billion in stock from its shareholders. But only 155 million shares are being purchased at the $24.75 set price, reducing the company's float by 1.5 percent, according to a preliminary count the company released Friday, the morning after the offer expired. The total cost of this buyback is $3.8 billion.

"It tells you that for the most part investors feel the stock's worth more than $24.75, which I think is a positive message for shareholders and obviously why the stock's reacting positively today," said Alan Davis, senior research analyst, at D.A. Davidson & Co. He does not own shares, but the company makes a market in the stock.

Microsoft shares climbed $1.09 to $25.79 on above-average volume Friday.

The company had intended to use $20 billion from its huge cash reserve to purchase about 808 million shares in the modified Dutch auction set for the tender offer. That would have reduced Microsoft's float by about 8 percent and added an estimated 5 to 6 cents per share to fiscal 2007 earnings.

Microsoft said it will use the balance of the funds dedicated to the Dutch auction to expand the longer-term buyback program. With that amount, the company is now planning to devote $36.2 billion to repurchasing shares through July 30, 2011, up from $20 billion announced last month.

This repurchase program has no set schedule and will be carried out at management's discretion, Microsoft has said.

The change in plans is likely to diminish the near-term earnings-per-share boost that had been expected from the Dutch auction.

Goldman Sachs analyst Rick Sherlund estimated the $16.2 billion would fetch about 650 million shares. If the company were able to buy back 10 million shares a day, which Sherlund called an aggressive target, it would take about 65 trading days to complete.

The longer time frame to repurchase shares could boost earnings by 3 to 4 cents per share, Sherlund said in a note to investors Friday morning. Goldman Sachs does investment banking business for Microsoft and co-managed the Dutch auction.

Charlie Di Bona, senior equity analyst with Sanford C. Bernstein, said the symbolic importance of the buyback plan remains intact.

"The bigger thing was less about the EPS boost, but more about the signaling effect that they were going to be very aggressive in repurchasing the shares," said Di Bona, whose parent company owns Microsoft shares. "That they're going to go buy them anyhow is also an aggressive stance."

Di Bona lowered his earnings forecast for the first quarter by a penny to 31 cents a share.

Investors have been clamoring for Microsoft to use more of its cash hoard — $34.2 billion on June 30 — to buy back more shares. The company returned $86 billion in dividends and buybacks to shareholders from fiscal year 2002 to 2006.

When Microsoft announced in April that it would increase spending on research and development by $2.7 billion in the 2007 fiscal year, shares tumbled nearly 13 percent.

Friday's closing price is the first time the stock has surpassed $25 a share since then.

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com