Microsoft's Buyback: No Big Deal

The rate of stock repurchasing will actually slow, allowing more cash for acquisitions.
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SAN FRANCISCO -- Before investors become too impressed by Microsoft's (MSFT) - Get Report$40 billion stock buyback , consider that it pales in comparison with the company's recent repurchasing activity.

The stock gained 1% on Monday following the announcment of the program, and had gained an additional 2.5% to $26.04 on Tuesday.

While many in the media were quick to classify the move as one of the biggest buyback programs in the company's history, quashing any chance of a deal with

Yahoo!

(YHOO)

, it instead sets a repurchasing pace of less than half that conducted over the past two years.

What's more, Microsoft isn't prevented from buying up as much of Yahoo! as it wants, should investor Carl Icahn eventually have his way as a newly minted member of that company's board.

Microsoft has set the buyback bar pretty low: Unless it accelerates its new program, its five-year plan works out to a mere $8 billion a year. That's a little more than the $7 billion spent on buybacks in the two quarters before the company's takeover bid for Yahoo! -- when Microsoft was no doubt stockpiling cash.

Once those deal talks ended, Microsoft bought back another $4.3 billion in one quarter, bringing its fiscal 2008 total to $12.5 billion.

And two years ago, Microsoft spent a whopping $27.6 billion on repurchases, bringing its total since fiscal 2006 to $40.1 billion. Yes, $40.1 billion in just two years.

Microsoft itself made the point on Monday: It spent $115 billion on share repurchases and dividends during the past five years, the company said. During that time, it bought back $70.7 billion worth of its shares.

Microsoft's operating cash flow, which was $21.6 billion in the year ended in June, allows the company to make a much bigger investment in its shares than $8 billion a year. But the company may be anticipating tightening sales of business software -- and higher costs of sales -- in a stressed economy. And executives in charge of this cash machine have other plans for its free cash flow, which totaled over $14 billion in 2008 -- namely, acquisitions. Microsoft emphasized at its most recent analysts' meeting that its online strategy calls for buyouts of online properties and related businesses.

And while Microsoft may never again consider buying all or part of Yahoo!, that online search company's value has sunk back below its pre-bid price range, ensuring that Microsoft will never renew a bid at anything close to the $45 billion it once offered. Yahoo! shares were recently trading at $18.91.

Still not convinced that Microsoft has the wherewithal to pay for a piece of Yahoo? Then consider Microsoft's new debt-financing option, announced Monday. The board of this debt-averse company has authorized financing of up to $6 billion for working capital and buybacks. But it's just as likely to put it toward acquisitions. A partially leveraged buyout was always part of Microsoft's Yahoo! plans, while financing gives Microsoft the flexibility to use its cash on hand for buyouts without worrying about temporarily halting promised repurchases.

Microsoft announced Monday that its commercial paper received the highest ratings available from Standard & Poor's and Moody's.

Amid a market in turmoil, with many cash-strapped companies scrambling to hold onto their credit ratings, Microsoft is showing off, inviting us to watch it glide above the Wall Street maelstrom while balancing debt, buybacks, acquisitions and a big 'I'm a PC' ad campaign on its head.

Investors can only hope it's confidence -- not hubris.