by Tom Taulli | September 19, 2012 1:17 pm
Trying to decide what to do with $56 billion in the bank is a nice problem for any company to have … right?
Well, this is the situation for Microsoft (NASDAQ:MSFT), and it’s not easy for it to find things to spend the money on. Interestingly, this is likely to be a drag in the long haul.
No doubt, Microsoft is not sitting still. Yesterday the company announced a 15% hike to its dividend, making for its seventh increase since 2004. But still, this will only use up about $1 billion per year.
And Microsoft is actually not alone. Other cash-rich companies — like Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) — can’t seem to put much of their money to work.
Some companies, though, have been able to buck the trend. Apple (NASDAQ:AAPL) is of course the prime example because of its innovative products like the iPad and iPhone.
The irony is that Microsoft once had the same innovative spirit. In fact, it lasted from about 1980 to 2000, when the company introduced Windows, Office, server products and Internet Explorer. Microsoft even fought aggressively against tough competitors like WordPerfect, Novell, Netscape and yes, Apple.
So what happened? I think the answer is simple. Bill Gates left.
When building a franchise company, the founder is absolutely critical. That continues to be the case with Sergey Brin and Larry Page at Google. It’s also vitally important with Amazon’s (NASDAQ:AMZN) Jeff Bezos.
But when a legendary founder leaves, the glory days often fizzle out. This doesn’t necessarily mean there will be failure. Instead, a company will probably get defensive and not have a good sense of how to attack market opportunities.
This appears to be the exact situation with Microsoft.
Do you think Gates would have missed the opportunity for the tablet? What about the strategy to team up with Nokia (NYSE:NOK) on the smartphone? Most likely, Gates would have been obsessed with winning the mobile market.
Instead, the company is mostly concerned about protecting its markets. To this end, it has made acquisitions for companies like Yammer to help make the move to the cloud.
However, such actions will not create much growth. They are just ways to transition product categories — not create new ones.
This strategy is not necessarily bad. For the next few years, it is hard to imagine that Microsoft’s cash flows will come under threat. But without much new growth ahead of it, the likelihood of seeing Apple-like returns is laughable.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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