A major buzzword in business today is Agile. More and more managers and CEOs want to embrace the fast moving, quick to adapt model that has fueled some of the most prolific growth in the companies of our day. Some examples of agile companies include Amazon, Google and a growing number of tech statups.  Amazon releases changes to their website for customers to use every 11.6 seconds. Google is now able to add changes to it’s live search index in a matter of hours for billions of sites around the world. Nimble startups can create a ready-to-sell product in a weekend with very little overhead. Time to Market With examples of very large companies able to move so quickly, it may be a surprise to some that Microsoft still releases a new version of its flagship product, the Windows operating system, every couple of years. One explanation may be that an operating system is more complicated than Amazon’s shopping system, but then Microsoft Window’s biggest competitor, Linux, releases several times a year: Starting in 2004, the release process changed and new kernels started coming out on a regular schedule every 2–3 months… Microsoft’s CEO, Steve Ballmer, has restructured the company several times during his 13 years at the companies head. Recently he announced yet another restructuring Microsoft. Previous restructurings at Microsoft had the aim of moving the company in a more agile direction. This was accomplished by granting autonomy to individual product groups. This restructuring appears to be going the opposite direction. The company said it will shift from largely autonomous product groups to a more horizontal structure While some of the rhetoric from Microsoft about this restructuring claims to improve their overall performance as a company, some analysts are wondering how that will be, since the proposed horizontal structure will require more discussion and meetings. Control vs. Agility Michael Gerber describes a business triad in which all business roles fall into one of three main heads: Entrepreneur, Manager and Technician. In the case of the more agile companies I cited above, there is a strong vision. The entrepreneurial clarity is communicated effectively to all employees. Managers and technicians alike understand the vision as its being passed down. Autonomous groups...

There has been a lot of press surrounding the release of Windows 8. Good and bad press are expected when a new product, especially one that deviates significantly from an established norm, is released to market. In the case of Windows 8, the amount of negative press may have taken Microsoft a bit by surprise. In May, the Wall Street Journal published an article highlighting the disconnect between Microsoft’s vision of computing and users expectations. Two notable disconnects include the developing gap in computing use cases and what appears to be a design by committee failure. Culture of Computing The culture of computing has evolved rapidly over the last three decades. This evolution had been spurred by both computing power and the cost for that computing power. As computing power increased, so did the quality of the graphics, audio and a broad range of uses that weren’t possible before. These include processing large amounts of data in applications such as spreadsheets and databases. The cost of that computing power has also come down significantly, which has created a consumer market where there was previously a majority business market. As high end computing made it into the hands of the consumer, the typical business use cases were replaced with entertainment and hobby use cases. Rather than spreadsheets, consumers wanted to listen to music and watch video. The ends to which that computing power was applied began to change significantly. The growing interconnectedness of the Internet meant that much of the computing power previously required on a personal computer was being moved onto servers, which allowed consumers to do more of what they wanted with less computing power and less specific computing know how. During much of this evolution, Microsoft’s focus on the desktop operating system maintained its focus on original business use cases and did very little with the emerging consumer use cases. Meanwhile, visionaries like Steve Jobs saw that most consumer use cases could be accommodated with very little computing power and a smaller screen. Along came the iPhone and iPad. A major shortcoming related to Microsoft’s design of Windows 8 is that it failed to recognize that the smartphone and tablet computing market serve a different set of...

Options are a device that allows an investor to hedge potential losses for a cost. A call option gives the purchaser the right, but not the obligation, to buy a stock at a given price. A put option gives the purchaser the right, but not the obligation, to sell a stock at a given price. The counter party to the agreement has the obligation to either sell or buy (call and put) at the agreed price if the option is exercised. The exercise date is always in the future, and the further an option is in the future, the more it will cost. How much more depends on the exercise price, interest rates and the volatility of the stock. To give you an idea, here’s some data from Microsoft and Google showing the call option prices going four months into the future. I obtained this data from Yahoo! Finance for Microsoft and Google. To make monthly analysis more relevant, I’ve included only the call options that have been traded for a given strike price in each of the four months analyzed. I also collapsed recent trade prices for options with the same strike price in some cases. Call Option Pricing Microsoft The stock price at the time these options values were captured was $34.54. July, 2013 August, 2013 September, 2013 October, 2013 Strike Last Last Last Last stdev (annual) $29.00 $5.69 $4.50 $5.35 $5.77 1.743 $30.00 $4.81 $4.75 $4.80 $4.85 0.123 $31.00 $3.66 $3.85 $3.80 $4.09 0.537 $32.00 $2.77 $2.88 $2.97 $3.22 0.575 $33.00 $1.88 $2.20 $2.32 $2.55 0.837 $34.00 $0.77 $1.41 $1.66 $1.85 1.413 $35.00 $0.16 $0.86 $1.13 $1.33 1.533 $36.00 $0.25 $0.50 $0.70 $0.99 0.939 $37.00 $0.09 $0.24 $0.43 $0.63 0.702 $38.00 $0.03 $0.12 $0.28 $0.43 0.530 $39.00 $0.01 $0.03 $0.15 $0.27 0.361 $40.00 $0.02 $0.04 $0.08 $0.16 0.186 $41.00 $0.01 $0.02 $0.05 $0.11 0.135 Google The stock price at the time these options values were captured was $880.37. July, 2013 August, 2013 September, 2013 October, 2013 Strike Last Last Last Last stdev (annual) $700.00 $180.87 $179.00 $216.00 $186.00 51.831 $750.00 $135.10 $144.67 $127.40 $151.80 32.104 $770.00 $103.50 $113.90 $104.20 $126.00 31.591 $780.00 $102.73 $105.50 $122.00 $108.20 25.675 $800.00 $73.12 $87.90 $91.80 $94.40 28.519 $805.00 $81.22 $81.20 $114.04...

It’s often useful to understand how a company makes financing decisions, and where funds for investment originate. While financing decisions may not be a good indicator of likely growth or profit, they may be an effective indicator of company health. One way to segment this analysis is Internal funds Net equity issues Net borrowing Gather the data The data for this type of analysis is available on http://finance.yahoo.com. After searching for your desired company, click “Cash Flow” under “Financials”. Using that I found the cash flow details for Google and Microsoft. Net borrowing is listed directly. Net equity issues are listed as “Sale Purchase of Stock”. In order to get the amount of investment that came from internal funds (plowback), I take the “Total Cash Flows From Investing Activities” and subtract away Dividends, Sale Purchase of Stock and Net Borrowings. I can then get the proportions by dividing each of these by the total investing amount. I used the standard three years shown on the cash flow statement for this analysis. Microsoft funding sources Period Ending 29-Jun-10 29-Jun-11 29-Jun-12 Internal funds -18% 43% 62% Net equity issues 79% 62% 13% Net borrowing -2% -41% 0% Google funding sources Period Ending 30-Dec-10 30-Dec-11 30-Dec-12 Internal funds 125% 104% 110% Net equity issues 8% 0% 0% Net borrowing -32% -4% -10%   Review Based on the last three years it is observed that Microsoft much more frequently resorts to issuing stock and borrowing than Google. Also, the majority of the investment made by Google is from internal funds, even to the extent of investing savings from previous periods. They even purchased back some stock in one period to achieve a net positive equity issue. Here’s the original spreadsheet if you want to see how I arrived at the numbers above: Sources of funds for Google and...

Previously I calculated the beta (ß) and r-squared (R2) for Google and Microsoft relative to the market (DJIA). There are cases where it’s more useful to know how a company does relative to its peers or as part of a portfolio. Using the monthly values from that previous work, I compiled and ‘industry’ or ‘portfolio’ average of returns. That provided me with a ß and R2 for the industry.   As shown above, the software industry (my sample of GOOG and MSFT) has a ß=0.9847 and an R2=0.5163 relative to the market (DJIA). While that’s interesting, it’s also worth observing the ß and R2 of each company relative to the industry.   This table summarizes the observations in the plots shown above Company Beta-market Beta-industry R2-market R2-industry MSFT 1.0168 0.8919 0.4891 0.7066 GOOG 0.9526 1.1081 0.3101 0.7881 Some observations are less useful due to the small sample of only two companies. For example,  the ß values are proportionally distant from the industry. This is because the industry is made up of a sample of those two companies only. The R2 for the industry are very similar and both show better fit to data than the industry comparison. CAPM Recall that the cost of equity, re, can be obtained using the Capital Asset Pricing Model as follows: Using this and the data above, we can calculate the average cost of equity for the industry as represented by Google and Microsoft. We’ll use rf=0.1 and rm=6.2. That gives us: With the current economic state, the risk free rate has little impact on the equity rate. The beta for the industry relative to the market is also very tight, which reduces risk with respect to the...