David Einhorn, hedge fund manager and President of Greenlight Capital laid out his dislike for Steve Ballmer’s management of MSFT at the Ira Sohn Investment Conference yesterday…..This is likely to set up as an epic battle, as Einhorn with his boyish good looks has been known to go to the mat with managements before…Recall in 2008 when he called out Lehman Brothers’ accounting and went on teevee and told anyone who would listen that he was short LEH stock and that the company was badly misrepresenting their financial situation months before the firm went under…..Einhorn is essentially calling for the removal of Steve Ballmer, MSFT’s second largest shareholder (behind Bill Gates) as the CEO of the company. Einhorn’s Hedge fund owns 9 million shares worth about $230million.
EINHORN says MSFT “suffers from “Charlie Brown management………..Ballmer is weighing on the company’s share price…..It’s time for Microsoft’s board to tell Steve Ballmer, ‘All right, we see what you can do, let’s give so-and-so a chance………His continued presence is the biggest overhang on Microsoft’s stock”
He went on to state that: “Microsoft trades at a remarkable discount…..Microsoft is not getting credit for its achievements and prospects…….Ballmer’s problem is that he’s stuck in the past……He’s allowed competitors to beat Microsoft in huge areas, including search, mobile-communications software, tablet computing and social networking. Even worse, his response to these failures has been to pour tremendous resources into efforts to develop his way out of these holes.”
MY TAKE ON MSFT: Hard to disagree with a guy as successful as Einhorn given his track record of picking fights with managements…..problem is, the way I see it, his experience lies more with exposing managements for fraud late in the game (Allied Capital and Lehman Brothers) than affecting positive change during…..that said it seems like the crux of Einhorn’s argument is valuation and unlocking certain potential opportunities to help realize greater shareholder value…..
THE WAY I SEE IT IS THAT THE ONLY PERSON ON THE PLANET WHO CAN SAVE MSFT IS BILL GATES…….AND HE HAS MOVED ON TO BIGGER AND BETTER THINGS, LIKE SAVING THE PLANET. OH AND MAYBE STEVE JOBS, BUT I DON’T SEE THAT HAPPENING ANYTIME SOON.
-The company is not likely to ever show the growth it did in 1980s and 1990s and righting this massive ship will take drastic change……Ballmer’s judgement has to be called into question when you consider his near disastrous $40 billion bid for YHOO a few years back and the company’s general inability to keep up with any innovation…..
Stock is going lower before it goes higher and a high profile activist fight is not likely to help sentiment towards the stock…..think of that fight more like a primary where candidates from the same party are pitted against eachother- bringing out eachother’s faults in a nasty way, but at the end, everyone has to get behind a common cause…..the point here is that some open wounds likely to be further exposed by those very people who hope for the company to succeed and thus giving in ammo to the shorts…..
-Taking a page out of the company’s old playbook they will likely pay a huge special dividend or do a massive accelerated stock buy-back to help buoy the stock and deflect attention from management issues and hopefully distract activists…..
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TRADES I WOULD CONSIDER IF YOU ARE LONG OR YOU ARE CONSIDERING JUMPING IN TO RIDE EINHORN”S COATTAILS:
1st TRADE AGAINST A LONG ADD YIELD TO THE ALREADY 2.65% DIVIDEND YIELD….
-MSFT ($24.19) Own Stock here Sell the Jan12 20/27.50 Strangle for 1.20 (add almost 5% yield if stock btwn 20 and 29…
-Sell the Jan12 20 Put at .60 and
-Sell the Jan12 27.50 Call at ..60
Break-Even on Jan12 Expiration:
Downside: Btwn 20 and 24.13 you suffer loses of your long stock less the 1.20 in premium that you collect….Below 20 you are put the stock but effectively buy it at 18.80 (down 22% from Current Spot)
Upside: stock btwn 24.20 and 27.50 make up to 3.20 in profit from the stock that you are long and collect 1.20 in premium…..27.50 or above your long stock is called away but you have effectively sold it at 28.70 (up 18.5%)
BTWN 20 and 27.50 you take in the 1.20 in premium.
2nd TRADE RIDE EINHORN COATTAILS-GET LONG……
MSFT ($24.19) BUY Jan12 20/27.50 Risk Reversal for EVEN MONEY:
-Sell Jan12 20 Put at .60 and
-Buy the Jan12 27.50 call for .60
Break-Even on Jan12 Expiration:
BTWN 20 and 27.50 have no loss, mark to market btwn now and expiration you will have gains or losses as spot moves closer to the strike you are long or short.
Downside: losses at 20 (down 22%) get Put the stock at 20.
Uspide: get long at 27.50 (up 18.5%)