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Financial Analysis of Microsoft Corporation

Introduction
BACKGROUND OF MICROSOFT

Microsoft is the most prominent technology corporation in the world that deals with computers according to posts from big history.net. ’’ With annual revenues of more than $32 billion, Microsoft Corporation is more than the largest software company in the world: it is a cultural phenomenon.

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The company’s core business is based on developing, manufacturing, and licensing software products, including operating systems, server applications, business and consumer applications, and software development tools, as well as Internet software, technologies, and services’’. http://www.fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html

‘’The name of the famous person – Bill Gates comes in one’s mind with mention of the name of Microsoft. He is the founder of the company and is believed to be the smartest programmers ever.’’ http://www.bighistory.net/microsoft-a-short-history/. Led by him, Microsoft had witnessed its heydays and has been able to have its product on almost every personal computer in the world, and in the process creating standards in the technology industry as well as market re-definition.

‘’Gates was first exposed to computers at school in the late 1960s with his friend Paul Allen, the son of two Seattle librarians. By the time Gates was 14; the two friends were writing and testing computer programs for fun and profit. In 1972 they established their first company, Traf-O-Data, which sold a rudimentary computer that recorded and analyzed traffic data. Allen went on to study computer science at the University of Washington and then dropped out to work at Honeywell, while Gates enrolled at Harvard. Inspired in 1975 by an issue of Popular Electronics that showed the new Altair microcomputer kit just released by MITS Computer, Gates and Allen wrote a version of BASIC for the machine. Later that year Gates left college to work full time developing programming languages for the Altair, and he and Allen relocated to Albuquerque, New Mexico, to be near MITS Computer, where Allen took a position as director of software development. Gates and Allen named their partnership Micro-soft’’. http://www.fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html. The word Microsoft was developed from two different words, micro from microcomputer and soft from software. The name was registered in New Mexico with the secretary of state in November 1976. On November 1978, the first international office of Microsoft was established in Japan and its name was ASCII (American Standard Code for Information Interchange). It is now known as Microsoft Japan. In January 1979 the company’s headquarters was moved to Bellevue Washington. http://www.bighistory.net/microsoft-a-short-history/.

In the early 80’s, Microsoft witnessed a period of great success when IBM contracted the company to develop an operating system for its personal computers (PC), which was underway. In the late 80’s Microsoft issued IPOs (initial public offering) of over two million shares and in the space of one year the price or the shares tripled and in the process making Gates a billionaire at about thirty years of age.

Nonetheless, the company had lots of critics and legal cases against it from competitors and the likes. Microsoft success was further heightened by the tech bubble of the 2000 following the release of the windows XP, windows 2000,the acquisition of Visio corporation which stood as the largest acquisition in the life of Microsoft so far with transaction value of about One and half a billion dollars. The company also spread its tentacles into the world of gaming with their popularly known X-BOX which has remained a success till date.

DESCRIPTION AND ANALYSIS OF MICROSOFT’ PERFORMANCE OVERTIME

Key Dates:
1975: Microsoft is founded by Bill Gates and Paul Allen; they sell BASIC, the first PC computer language program to MITS Computer, Microsoft’s first customer.
1981: Microsoft, Inc. is incorporated; IBM uses Microsoft’s 16-bit operating system for its first personal computer.
1982: Microsoft, U.K., Ltd. is incorporated.
1983: Paul Allen resigns as executive vice-president but remains on the board; Jon Shirley is made president of Microsoft (he later becomes CEO); Microsoft introduces the Microsoft Mouse and Word for MS-DOS 1.00.
1985: Microsoft and IBM forge a joint development agreement.
1986: Microsoft stock goes public at $21 per share.
1987: The Company’s first CD-ROM application, Microsoft Bookshelf, is released.
1990: Jon Shirley retires as president and CEO; Michael R. Hallman is promoted in Shirley’s place; the company becomes the first PC software firm to surpass $1 billion of sales in a single year.
1992: Bill Gates is awarded the National Medal of Technology for Technological Achievement.
1993: The Company introduces Windows NT.
1995: Bill Gates publishes his first book, The Road Ahead.
1996: The Company acquires Vermeer Technologies and its software application, FrontPage.
1997: The Justice Department alleges that Microsoft violated a 1994 consent decree concerning licensing the Windows operating system to computer manufacturers.
1998: The U.S. Department of Justice files two antitrust cases against Microsoft, alleging the company had violated the Sherman Act.
2000: The Company acquires Visio Corporation, its largest acquisition to date.
2001: Microsoft Windows XP is released internationally.
2003: Microsoft launches Windows Server 2003.
2007: Microsoft launches Windows vista

2009: Microsoft launches windows 7

Source: http://www.fundinguniverse.com/company-histories/Microsoft-Corporation-Company-History.html

Balance sheet for Microsoft Corporation as at 30th June 2011. (Annually)
Assets [+]in Millions of Dollars

06/2010

06/2009

06/2008

06/2007

06/2006

Cash and Equivalents5,505

6,076

10,339

6,111

6,714

Restrictable Cash–

Marketable Securities31,283

25,371

13,323

17,300

27,447

Accounts Receivable13,014

11,192

13,589

11,338

9,316

Loans Receivable–

Other Receivables–

Receivables13,014

11,192

13,589

11,338

9,316

Inventories, Raw Materials172

170

417

435

465

Inventories, Work in Progress16

45

31

148

Inventories, Purchased Components–

Inventories, Finished Goods552

502

537

544

1,013

Inventories, Other–

Inventories, Adjustments & Allowances–

Inventories740

717

985

1,127

1,478

Prepaid Expenses–

Current Deferred Income Taxes2,184

2,213

2,017

1,899

1,940

Other Current Assets2,950

3,711

2,989

2,393

2,115

Total Current Assets55,676

49,280

43,242

40,168

49,010

Land and Improvements526

526

518

428

362

Buildings and Improvement8,187

7,824

6,030

4,247

3,146

Machinery, Furniture and Equipment7,546

6,732

5,996

4,691

3,715

Construction in Progress–

Fixed Assets, Other–

Fixed Assets, Total16,259

15,082

12,544

9,366

7,223

Gross Fixed Assets16,259

15,082

12,544

9,366

7,223

Accumulated Depreciation(8,629)

(7,547)

(6,302)

(5,016)

(4,179)

Net Fixed Assets7,630

7,535

6,242

4,350

3,044

Intangibles1,158

1,759

1,973

878

539

Cost in Excess12,394

12,503

12,108

4,760

3,866

Non-Current Deferred Income Taxes–

279

949

1,389

2,611

Other Non-Current Assets9,255

6,532

8,279

11,626

10,527

Total Non-Current Assets30,437

28,608

29,551

23,003

20,587

Total Assets86,113

77,888

72,793

63,171

69,597

Liabilities [+]in Millions of Dollars

06/2010

06/2009

06/2008

06/2007

06/2006

Accounts Payable4,207

5,008

4,034

3,247

2,909

Short Term Debt1,000

2,000

Notes Payable–

Accrued Expenses–

Accrued Liabilities3,283

3,156

2,934

2,325

1,938

Deferred Revenues13,652

13,003

13,397

10,779

9,138

Current Deferred Income Taxes–

1,557

Other Current Liabilities4,005

3,867

9,521

7,403

6,900

Total Current Liabilities26,147

27,034

29,886

23,754

22,442

Long Term Debt4,939

3,746

Deferred Income Tax229

Other Non-Current Liabilities8,623

7,550

6,621

8,320

7,051

Minority Interest–

Capital Lease Obligations–

Preferred Securities of Subsidiary Trust–

Preferred Equity Outside Shareholders’ Equity–

Total Non-Current Liabilities13,791

11,296

6,621

8,320

7,051

Total Liabilities39,938

38,330

36,507

32,074

29,493

Preferred Shareholder’s Equity–

Common Shareholder’s Equity46,175

39,558

36,286

31,097

40,104

Common Par62,856

62,382

62,849

Additional Paid in Capital–

60,557

59,005

Cumulative Translation Adjustments–

149

Retained Earnings(16,681)

(22,824)

(26,563)

(31,114)

(20,130)

Treasury Stock–

Other Equity Adjustments–

1,505

1,229

Total Capitalization51,114

43,304

36,286

31,097

40,104

Total Equity46,175

39,558

36,286

31,097

40,104

Total Liabilities & Shareholder’s Equity86,113

77,888

72,793

63,171

69

Closing price =$25.51

Volume sold =25.16m

Source:http://www.answers.com/main/dsdata?dsid=2940&templateid=0&cid=27590212&qm_page=30703. [Accessed 4 April 2011].

With more descriptive statistics, we can also examine the performance of Microsoft on a monthly basis from the year 1988- 2009 using returns (unit%)

See excel for descriptive statistics.

Microsoft return (unit %)

Market return (unit %)

Mean0.021622876

Mean0.857870722

Standard Error0.00618845

Standard Error0.269942879

Median0.022084196

Median1.41

Mode0.064221396

Mode1.78

Standard Deviation0.100359793

Standard Deviation4.377737838

Sample Variance0.010072088

Sample Variance19.16458858

Kurtosis1.421423202

Kurtosis1.709578314

Skewness0.366537791

Skewness-0.812673531

Range0.751310392

Range29.51

Minimum-0.343529412

Minimum-18.46

Maximum0.40778098

Maximum11.05

Sum5.686816298

Sum225.62

Count263

Count263

From the descriptive statistics above, Microsoft has a positive skewness unlike the market whose skewness is negative, this indicates that Microsoft has a better flow or return than the market.

It could also be noted that Microsoft is (1) standard deviation away from its mean whereas the market is (4) standard deviation away from its mean, this means that the returns of Microsoft had not been too volatile over the years and return on stocks are less risky.

COMPARISON OF MOCROSOFT PERFORMANCE WITH S&P 500 (MARKET) USING T-TEST

See t-test on Excel

H0: Microsoft did not outperform the market

H1: Microsoft outperformed the market

t-Test: Paired Two Sample for Means

Variable 1

Variable 2

Mean0.021622876

0.857870722

Variance0.010072088

19.16458858

Observations263

263

Pearson Correlation0.539530773

Hypothesized Mean Difference0

df262

t Stat-3.136067434

P(T<=t) one-tail0.000953757

t Critical one-tail1.650690284

P(T<=t) two-tail0.001907515

t Critical two-tail1.969059657

Conclusion:

From the t-Test above, since the t-stats is greater in value than the t -critical (irrespective of the -ve sign), we need to accept the alternative hypothesis (H1) which says that Microsoft outperformed the market and reject the Null hypothesis (H0) which says that Microsoft did not outperform the market.

We can also infer this conclusion by looking at the P- value, here we can see that the p- value is less than the significance level of .05, therefore we need to accept the alternative hypothesis (H1).

ANALYSIS OF MICROSOFT PERFORMANCE WITH CAPM
Regression Statistics

Multiple R0.258985259

R Square0.067073365

Adjusted R Square0.063498933

Standard Error0.185690508

Observations263

ANOVA

df

SS

MS

F

Significance F

Regression1

0.647027164

0.647027164

18.764764

2.11102E-05

Residual261

8.999531777

0.034480965

Total262

9.646558942

Coefficients

Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept-0.32415329

0.011530623

-28.1123831

6.17385E-81

-0.346858177

-0.30145

-0.34686

-0.30145

X Variable 10.011371441

0.002625088

4.331831484

2.11102E-05

0.006202393

0.01654

0.006202

0.01654

CAPM :- E(R)=RF+?[RM-RF]

By substituting the CAPM formula into the regression, we have Y= ?+?x+e

Y = dependent variable

? = intercept

? = co-efficient of independent variable

e =error

When x=0, ? is an estimate of Y, then excess return of Microsoft would be given as: Excess return= -0.32415329+0.011371441+0.185690508

Adjusted R Square = 0.063498933

The adjusted R Square indicates that 6.3% of the variability in the excess return of Microsoft is explained by the market. I.e. for every percentage change of return in the market, Microsoft’s return changes by 6.3%.

BIBLIOGRAPHY

Andrews, Paul. How the Web Was Won: Microsoft from Windows to the Web: The Inside Story of How Bill Gates and His Band of Internet Idealists Transformed a Software Empire. New York: Random House, 1999.

Consuming, Michael A., Microsoft Secrets: How the World’s Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People, New York: Free Press, 1995, 512 p.

Desmond, Edward W., “Microsoft’s Big Bet on Small Machines,” Fortune, July 20, 1998, pp. 86-90.

“EU, Microsoft Clash Over Monopoly Ruling,” Associated Press, April 29, 2004.

Evers, Joris, “Ballmer: Windows Server 2003 Does More with Less,” IDG News Service (San Francisco Bureau).

France, Mike, “Microsoft: The View at Halftime,” Business Week, January 25, 1999, p. 78.

Hamm, Steve, “No Letup–And No Apologies: Antitrust Scrutiny Hasn’t Eased Microsoft’s Competitiveness,” Business Week, October 26, 1998, p. 58.

Higgins, David, “The Man Who Owns the Future,” Sydney Morning Herald, March 14, 1998, p. 1.

Iceboat, Daniel, and Susan L. Knepper, The Making of Microsoft: How Bill Gates and His Team Created the World’s Most Successful Software Company, Rocklin, Calif.: Prima Publishing, 1991, 304 p.

Ichbiah, Daniel, and Susan L. Knepper. The Making of Microsoft: How Bill Gates and His Team Created the World’s Most Successful Software Company. New York: St. Martin’s, 1991.

Isaacson, Walter, “In Search of the Real Bill Gates,” Time Magazine, January 13, 1997, pp. 44+.

Kirkpatrick, David, “He Wants All Your Business–And He’s Starting to Get It,” Fortune, May 26, 1997, pp. 58+.

Kirkpatrick, David, “Microsoft: Is Your Company Its Next Meal?,” Fortune, April 27, 1998, pp. 92-102.

Krantz, Michael, “If You Can’t Beat ‘Em … Will Bill Gates’ Bailout Save Apple–Or Just Strengthen Microsoft’s Hand in the Web Wars?,” Time Magazine, August 18, 1997, pp. 35+.

Manes, Stephen, and Paul Andrews, Gates: How Microsoft’s Mogul Reinvented an Industry–And Made Himself the Richest Man in America, New York: Doubleday, 1993.

Mardesich, Jodi, “What’s Weighing Down Microsoft?,” Fortune, January 11, 1999, pp. 147-48.

McKenzie, Richard B., Trust on Trial: How the Microsoft Case Is Reframing the Rules of Competition, Perseus Publishing, 2000.

Microsoft Corporation. Inside Out: Microsoft—In Our Own Words. New York: Warner Books, 2000.

Moody, Fred, I Sing the Body Electronic: A Year with Microsoft on the Multimedia Frontier, New York: Viking, 1995, 311 p.

Nocera, Joseph, “High Noon,” Fortune, November 23, 1998, pp. 162+.

Pollock, Andrew, “Media; Microsoft Makes Another Interactive TV Investment,” New York Times, January 24, 2000.

Schlender, Brent, “What Bill Gates Really Wants,” Fortune, January 16, 1995, pp. 34+.

Stross, Randall E., The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition, Reading, Mass.: Addison-Wesley Publishing, 1996, 318 p.

Wallace, James, and Jim Erickson, Hard Drive: Bill Gates and the Making of the Microsoft Empire, New York: Wiley, 1992, 426 p.

Source: International Directory of Company Histories, Vol.63. St. James Press, 2004.

http://www.answers.com/topic/microsoft#ixzz1Ia9E8U5d

http://www.answers.com/main/dsdata?dsid=2940&templateid=0&cid=27590212&qm_page=30703

http://www.bighistory.net/microsoft-a-short-history/

http://www.fundinguniverse.com/company-histories/Microsoft-Corporation-

Company-History.html

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