Why Isn’t Buffett on the Microsoft Board?

The Microsoft board has been accused in some quarters of poor capital allocation. There is plenty of evidence to support this, not least the recent Yahoo bid, the $6B cash purchase of aQuantive and the Gucci loafer in the door at Facebook. When Microsoft paid $240M for a 1.6% stake in Facebook it was valuing a company with $140M in revenues and $30M in profits at over $15B. Some may excuse that sort of stupidity as strategic, to me it’s just plain stupid. All three deals have one thing in common, an absolute ludicrous overpayment which will not have a good return on investment for Microsoft shareholders.

So why isn’t Warren Buffett on the Microsoft board?

Buffett is considered one of the best capital allocators around, so why wouldn’t his good mate Bill Gates get him on board? After all Bill sits on the Berkshire board. Interestingly Yahoo President Susan Decker also sits on the BRK board. I wonder if Warren is chiding them like children who can’t share their toys. The cynical amongst us may suggest that the Microsoft board wouldn’t want Buffett on the board as they’d see him as a real party pooper. “Oh come on Warren why can’t we pay five times what this company is worth”, “Warren can’t you see the intrinsic value is making us in charge of an even bigger company, that’s the value!”

I view Microsoft as good, but not fantastic value at the current $29.20. I believe people are overestimating the short term threats to Microsoft, while others are underestimating the long term threats. This is due to a common human trait of overestimating what can be done or will happen in a single year while underestimating what can be achieved or will happen in a decade. In investing I like to consider both the near and long term. In valuing Microsoft right now I think good comparisons can be drawn to newspapers ten years ago. Softie will continue to churn out prodigious amounts of free cash over the coming years, one estimate I saw called for $54B in FCF over the next three years. Using a discounted cash flow model with conservative inputs I view MSFT as good value with a 10-20% margin of safety. I would be interested in buying if the board could demonstrate some capital allocation prowess. Walking away from the Yahoo deal is a step in the right direction.

This thread on the Liquid Lounge Board at the Motley Fool covered most of the current arguments on MSFT.

BMW Method 20 year chart for MSFT

          AVE      CUR     RETURN                    6-MO
TICKER   CAGR     CAGR     FACTOR      RMS   PRICE    CHG
---------------------------------------------------------
MSFT    24.5%    19.7%       2.14    -1.17   29.24   -12%

Cheers
Dean