From the May 2009 issue of Treasury & Risk magazine

Framing the Future

Coping with the disarray in the economy and the markets these days seems like a full-time job for any finance executive. But Chris Liddell, Microsoft's CFO, argues that if executives spend all their time dealing with the current crisis, they're missing the opportunity to devise a strategy for thriving in new economic circumstances once the recession ends. "It's important that finance people don't just focus on how we get through today and tomorrow and next month," Liddell says. "It's how we set the company up for success in the future."

Liddell describes the current turmoil as a "reset," and expects the economy emerging from the reset will operate at a lower level than it has in recent years. If activity is going to be subdued, "obviously the challenge is who will succeed well in that environment and who will not succeed well," he says.

"If my view of the world is correct--that we're going to see low or sustainable growth--then it is going to be even more important than it has been to be in the right growth areas, to pick the parts of the market which are higher growth than others, to be investing in the right areas and to be investing in the areas where you can out-innovate the competition," he says. "So the premium for success in a lower growth environment is even more important than it has been in the past."

Liddell, 50, a native of New Zealand, was CFO for Stamford, Conn.-based International Paper before signing on as Microsoft's finance chief in 2005. Prior to joining International Paper's finance department in 2002, he had served as CEO and CFO of Carter Holt Harvey, a New Zealand paper company, and worked as an investment banker.

Microsoft has felt the impact of the economy's slump. For the quarter that ended Dec. 31, it reported that net income dropped 11% from the year-earlier period and cited an 8% decline in client revenue that it said reflected the weak PC market and consumers' shift to cheaper netbooks. The company also said that given the market volatility, it would not offer revenue or earnings guidance for the remainder of the current fiscal year, which ends in June.

When it comes to dealing with the economic stresses, Liddell says companies should follow a three-prong approach of reconsidering their level of spending, deciding which spending matters most and safeguarding their liquidity.

"Rightsizing costs is priority number one," he says. "Having figured out what your cost structure is, prioritizing spending becomes number two, because companies still obviously need to invest through the reset period. But what they invest in, and how successful they are at prioritizing the right spend will really determine how successful they are coming out of the reset."

Conserving the company's liquidity is the third step and companies face many challenges when it comes to borrowing money, refinancing debt and monitoring the credit risk of their customers. Microsoft has used its finance arm, Microsoft Financing, to provide support on a selective basis to customers experiencing liquidity issues, he notes.

Of course, when it comes to liquidity, Microsoft is sitting pretty compared to most other companies. At the end of last year, it had $20.7 billion of short-term cash and its debt amounted to just $2 billion of commercial paper. (That compares to a median cash position of $6.8 billion among S&P companies.)

But Liddell says the company's ample cash reserves don't exempt it from the need to cut costs. "The fact that we've got a lot of cash on hand doesn't excuse us from having what I've described as the rightsizing of costs. Spending is just as important for us as anyone else because where we spend our money is just as critical in terms of making the right investments for the next five to 10 years as for any other company."

And asked about the accomplishment of which he's proudest, Liddell notes how quickly the software giant, with $60.42 billion of revenue in fiscal 2008, responded when the economy headed south late last year. In January, Microsoft announced a number of measures designed to save $1.5 billion in operating expenses in the current fiscal year, including up to 5,000 job cuts, and eliminating $700 million in capital expenditures.

"We managed to take cost out very quickly and also change the overall strategy going forward," he says.

Microsoft's current cash position marks a big change from its even more ample reserves a few years ago; the cash position peaked at $64.4 billion in the first quarter of fiscal 2003. Liddell says the company decided prior to his arrival in 2005 to pare back those cash holdings and he accelerated the process. "I think we all agreed that was more cash than we needed to have for any reason, whether it be risk-related or opportunity-related," he says.

Over the last few years, Microsoft has used dividends and stock buybacks to redistribute cash to shareholders. "I'm much more comfortable now that we have a level of cash which is more reasonable given opportunities that we have," Liddell says.

"I think the technology industry overall is maturing in terms of capital structure progressively, and we are maturing with it as well," he adds.

At the same time that Microsoft reduced its cash position, it dipped its toe into the debt markets with a $2 billion commercial paper program, which Liddell notes has allowed the company to borrow at "extremely attractive rates." Microsoft also filed a shelf registration last fall for a $4 billion bond offering, although it has yet to sell bonds. Liddell says the Triple-A rating assigned to the company's debt last fall "obviously was a huge credit to both the company and the treasury people who worked on it--to achieve a credit rating like that in the middle of the current economic storm." Microsoft is one of just five companies with a Triple-A rating.

Microsoft has been fairly acquisitive since Liddell's arrival, although of course it failed last year to bag its biggest target to date, Yahoo. Liddell says Microsoft plans more purchases, but he argues that it may take some time before prices reach attractive levels. "We are making some small [acquisitions] at the moment and other companies are as well. I think what tends to happen in this sort of environment, though, is that sellers' expectations don't go down as quickly as the market values do," he says. "The longer the reset goes on and the longer that share prices and asset prices stay around where they are now, the more people start to reset their expectations as well, and hence the more probable it is you'll find a willing-buyer, willing-seller situation."

Liddell acknowledges the difficulties involved in planning ahead given the swings in the economy. "The current environment is probably more uncertain than any situation that we've seen in most of our lifetimes. But that doesn't mean that you shouldn't plan responsibly," he says. "What it probably means is that you need to be more scenario-based, possibly more conservative in some of your upside expectations and planning."

And he says the work involved in setting a company's course for the post-recession world will increase the influence of finance departments. Determining the right level of spending and maintaining a company's liquidity have "always been part of finance's arsenal, if you like," Liddell says. "But I think most companies would say that all of those three things are much more critical in the current environment than they have been, and hence finance's role is becoming more important."

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