WORLD> America
Does Ballmer have a plan B for Microsoft?
(Agencies)
Updated: 2008-07-24 07:48

Microsoft Corp Chief Executive Officer Steve Ballmer says he plans to spend hundreds of millions of dollars to fix the company's unprofitable Internet business. His investors say they want proof he knows what to do with the money.

After walking away from six months of on-again, off-again talks about buying all or part of Yahoo Inc, owner of the No 2 Web search engine, Ballmer has left shareholders wondering if he has a plan B.

Microsoft, the biggest software maker, has lost about $90 billion in market value this year as Ballmer vacillated on Yahoo and failed to show how he would crack Google Inc's dominance of Internet advertising. Shareholders will look for ideas at a meeting with Ballmer today, said Kim Caughey, a Fort Pitt Capital Group Inc analyst in Pittsburgh.

"I'm a little concerned; I'll be honest," said Caughey, whose firm manages $1.2 billion and owns Microsoft shares. Ballmer needs to "put a hot, bright light of clarity on where's all the money going".

Ballmer, along with Chief Financial Officer Chris Liddell and the presidents of Microsoft's three businesses, will address analysts and investors today at company headquarters in Redmond, Washington. Spokesman Frank Shaw declined to comment because the information is scheduled for release at the meeting.

The company has spent about $9 billion in the past two-and-a-half years building its Internet business, according to Directions on Microsoft, a research firm in Kirkland, Washington. Microsoft doesn't provide figures.

Liddell said on a conference call after last week's earnings release that spending on the online business, which includes the MSN website and Live search engine, will rise by "several hundreds of millions of dollars" in the fiscal year that began on July 1.

The online business is in a "period of significant investment" and will "be a drag on an otherwise exceptionally good performance" this year, Liddell said on the July 17 call. Net income rose 42 percent last quarter to $4.3 billion on an 18 percent sales increase.

Microsoft also lowered its full-year earnings forecast. The stock sank 6 percent the next day. It rose 16 cents to $25.80 in NASDAQ Stock Market trading on Tuesday, and is down 28 percent this year.

The online division is Microsoft's smallest with $3.21 billion in sales last year, or 5 percent of the total of $60.4 billion. The business lost $1.23 billion last year, double the previous year's loss, as it hired more people, built computer data centers, and made acquisitions including $6 billion spent on Seattle-based ad company AQuantive Inc.

In May, Ballmer abandoned his bid for all of Yahoo. The acquisition would have tripled Microsoft's share of US online queries. Sunnyvale, California-based Yahoo rejected a bid of $47.5 billion.

He then attempted to persuade Yahoo to sell its search business. Instead, Yahoo struck a deal to carry ads from Mountain View, California-based Google.

Ballmer next may look at Time Warner Inc's AOL unit, said Laura Martin, an analyst at Soleil Securities Group Inc in Los Angeles. "AOL is more valuable to Microsoft in a world where Yahoo is aligned with Google," Martin said.

"It seems like somewhere there's just a whole bunch of backup plans and he's working through all of them," said analyst Tony Ursillo at Loomis Sayles & Co in Boston.

Yang's optimism

With Microsoft's takeover bid off the table and his company's stock price down 20 percent during his 13-month reign as Yahoo's CEO, Jerry Yang has a message for his exasperated shareholders: Things aren't as bleak as they look.

"This company is doing just fine in a tough economy and a tough environment," Yang said. "We think there are a lot of good things to come still."

Yahoo Inc's second-quarter results did not provide much reason for enthusiasm.

But at least they were not as bad as many investors feared after Yahoo spent months sparring with Microsoft Corp and dissident shareholder Carl Icahn while also trying to cope with a weakening US economy that is make it tougher to sell online advertising - the company's lifeblood.

"It was a 'rice-cracker' quarter," said Canaccord Adams analyst Colin Gillis. "It didn't taste great, but it wasn't totally horrible either."