Microsoft/Intuit Case Study
1. What factors have contributed to Microsoft’s large cash hoard? | 1985 | 1986 | 1987 | 1988 | 1989 | Cash and Marketable Securities | 18.9 | 102.7 | 132.5 | 183.2 | 300.8 | Stockholders' Equity | 54.5 | 139.3 | 239.1 | 375.5 | 561.7 | Net Profit | 24.1 | 39.3 | 71.8 | 123.9 | 170.5 | ROE | 44.22% | 28.21% | 30.03% | 33.00% | 30.35% | New Cash and Marketable Securities | 2.8 | 4.1 | 9.3 | 18.6 | 25.2 | New Stockholders' Equity | 38.4 | 40.7 | 115.9 | 210.9 | 286.1 | New Net Profit | 23.5 | 37.4 | 67.5 | 118 | 157.7 | ROE (after adjusted) | 61.20% | 91.89% | 58.24% | 55.95% | 55.12% | Increased ratio | 38.39% | 225.71% | 93.94% | …show more content…
Reasons behind the increase are:
1. Big change of net worth. The excess cash has nothing to do with liability. So when excess cash was taken out of the total asset, the net worth of Microsoft was greatly cut down.
2. Subtle change of net income. Excess cash is an additional amount of cash beyond what a company normally needs to have on hand. Excess cash can generate only very little revenue for the company because the company holds it and not treats it as input to generate output. So the total net income was influenced to a very subtle degree after the revenue generated by excess cash was taken out.
3. Big decrease in net worth/equity as the denominator and a relatively stable in numerator lead to a great increase in Microsoft’s ROE.
3. What options do they have for their excess cash besides buying Intuit?
-- Pour funds into research and development to secure a strong position in the future market. As mentioned in the case, new technology related to “online” services will be the main direction. The R&D costs will help Microsoft compete more aggressively and maybe next generations of product can beat the rivals like Intuit and win a bigger market share.
-- Establish joint venture with broadcasting companies, like NBC, with Cable and Internet service providers, like AT&T. Such move will speed up the arrival of online era. A more attractive online experience will definitely increase