Microsoft Corporation Financial Analysis

Introduction

In the half year ended 31 December 2008, Microsoft acquired twenty companies giving out consideration worth $1.6 billion. The consideration was given mainly in the form of cash. All the companies acquired during this financial year were included in the company’s results of operations starting from the date of their acquisition. The purchase price of the acquired companies is liable to revision based on the current fair value of assets and liabilities. Changes to the fair value of net assets are reflected in the amount of purchase price allocated to goodwill (Microsoft Corporation Form 10-Q, 2008).

Shareholders’ Equity

Shareholders’ equity refers to the amount of a company’s capital that is attributable to shareholders. It primarily consists of paid-in capital and retained earnings. Microsoft’s shareholders’ equity as at 31^st December 2008 was as follows:

31 December, 2008

	$ ‘‘millions’’
Common stock and paid-in capital:
Balance, beginning of period	62,849
Common stock issued	312
Common stock repurchased	(2,571)
Stock-based compensation expense	860
Stock option income taxes deficiencies	(58)
Other, net	–
Balance, end of period	61,392
Retained deficit:
Balance, beginning of period	(26,563)
Net income	8,547
Other comprehensive income
Net gains on derivative instruments	766
Net unrealized investment losses	(912)
Translation adjustment and other	(409)
Comprehensive income	7,992
Common stock cash dividends	(2,304)
Common stock repurchased	(6,039)
Balance end of period	26,914
Total shareholders’ equity	$34,478

Shareholders’ Equity to Total Assets Ratio

The ratio of shareholders’ equity to total assets indicates the proportion of a company’s assets that are funded by equity as opposed to debt. A low ratio shows that the company is highly leveraged which implies a high financial risk. A high ratio, on the other hand, indicates low leverage and lower financial risk (Paul, 2010).

Microsoft’s total assets, 31 December 2008 = $ 65,786 million

Microsoft’s shareholders’ equity to total assets ratio as at 31 December 2008 = Total shareholders’ equity/ Total assets = $34,478/65,786 = 0.524

Thus, Microsoft is roughly fifty percent leveraged and fifty percent equity funded.

Profit and ROI

Microsoft’s Income Statement for the Half-year ended 31^st December 2008

	$ ‘‘millions’’
Revenue	31,690
Operating expenses:
Cost of revenue	6,755
Research and development	4,573
Sales and marketing	6,706
General and administrative	1,718
Total operating expenses	19,752
Operating income	11,629
Other income (expense)	(309)
Income before income taxes	11,629
Provision for income taxes	3,082
Net Income	$8,547

ROI = (Net Income/Total Assets) ×100 = (8,547/65,786) ×100 = 13%

Microsoft’s Cost of Acquisition, Goodwill and Intangible Assets

Microsoft acquired twenty entities in 2008, giving a consideration of $1.6 billion in total. The total goodwill from acquired companies amounted to $1.2 billion while intangible assets increased by $1.6 billion as a result of the acquisitions. Further, the additions to intangibles assets consisted of $694 technology-based and $782 non-technology based intangible assets. Impaired intangible assets are recognized on a straight-line basis (Microsoft Corporation Annual Report, 2008). The composition of intangible assets acquired in this financial year is as follows:

Category	Amount (‘‘millions’’)
Contract-based	$91
Technology-based	787
Marketing-related	116
Customer-related	589
Total	$1,583

Recognition and Measurement of Asset Impairment Losses

As of December 31 2008, Microsoft was yet to adopt SFAS No. 141R that deals with business combinations. The new standard calls for changes in the manner in which acquired assets and liabilities are recognized. It also changes the way acquired assets and liabilities resulting from contingencies should be recognized. In addition, it calls for capitalization of R&D costs at fair value and recognizing expenses on acquisition costs when incurred (Microsoft Corporation Form 10-K, 2008).

References

Microsoft Corporation Annual Report. (2008). Web.

Microsoft Corporation Form 10-K. (2008). Web.

Microsoft Corporation Form 10-Q. (2008). Web.

Paul, W. (2010). Return on investment. Upper Saddle River, NJ: Pearson Education