Microsoft CFO sees tech mergers on rise

Potential acquisition targets felt that buyers weren't willing to pay high enough premiums during the market downturn, but that is starting to change, CFO Peter Klein said at the Reuters Global Technology Summit in New York.

The stock market has clearly rebounded, so you sort of feel like you're back to equilibrium, said Klein, who took over as CFO of the world's largest software company last November.

Microsoft, which has $39.7 billion in cash and short-term investments on its balance sheet, makes dozens of smaller deals each year, mostly under $250 million. But Klein said the company is unlikely to do a mega-acquisition, two years after its failed $47.5 billion bid to buy Yahoo Inc .

They are very hard to do, said Klein.

Tech deals are on the rise this year, with Hewlett-Packard Co slated to buy Palm Inc , and Germany's SAP agreeing to buy database software maker Sybase Inc for $5.8 billion.

Microsoft isn't interested in launching a counter offer for Sybase, said Klein, nor is it looking to buy SAP -- the world's top maker of business management software for large corporations -- after looking at such a deal about five years ago.

Microsoft constantly reviews potential deals in each of its five key business areas, said Klein.

We try and think ahead, so that when things happen there is not this big fire drill -- 'Oh my God, somebody bought something.'

GOOGLE ASSAULT

Microsoft has no deadline to turn a profit in online search, where its search engine Bing is growing but struggling to take market share from leader Google Inc .

I don't have a specific date, said Klein. I need to see the progress over time.

Microsoft's online business has lost more than $5 billion in the past three years, but Klein said he did not expect the rate of losses to increase, now that the one-time costs of ramping up Bing infrastructure are largely done.

Bing now has almost 12 percent of the U.S. online search market, up from around 8 percent at launch, but so far has not been unable to take a big chunk out of Google, which is hovering around 65 percent.

Including traffic it gets from Yahoo sites, under a deal finalized earlier this year, Microsoft is handling almost 30 percent of U.S. online searches. Klein did not identify the market share it needs to turn a profit and reap the benefits of scale.

Clearly, we need to continue to make progress. (If) there is a tipping point, I don't know precisely what it will be, he said. Probably a year from now, when we've started to make real progress integrating Yahoo (traffic), we'll have a much better sense.

Klein said there was evidence business technology spending in general is recovering from the downturn and will improve in the second half of this year and beyond, but he expressed concern that turmoil in Europe might hamper recovery there.

To the extent there is fiscal austerity that constrains overall economic growth, it's fair to think that might provide a headwind to IT spend (in Europe), he said. So we need to watch that very carefully. There's a lot of uncertainty.

WAITING ON DIVIDEND TAX

Microsoft, which handed more than $30 billion to shareholders in a special dividend in 2004, has no plans to repeat such a payout.

There is nothing under consideration now that is different than what we've been doing in the last several years, said Klein, when asked about a special dividend.

Microsoft started paying an annual dividend in 2003 and moved to quarterly dividends the year after, as it looked to channel more money back to shareholders as growth rates moderated.

Taxes on dividends could almost double to 40 percent next year for top-bracket taxpayers if tax cuts enacted by the Bush administration are allowed to expire.

We want to get their (investors') feedback on dividends, buybacks, and how tax policy may affect how they feel about that, said Klein. We wouldn't do anything in anticipation of potential legislation. We'll plan for it, but won't do anything until there is any actual change in the tax policy.

(Additional reporting by Jim Finkle and Paul Thomasch, Editing by Tiffany Wu, Derek Caney and John Wallace)