What Will Microsoft Do With $3.75B?

Microsoft is raising $3.75 billion through a bond offering that should be candy to Wall Street. Moody's Investor Services rates the bonds AAA because of "the company's position as the world's largest software company with a strong and defensible market position throughout its diverse core offerings." That's for anyone who still listens to Moody's.

Lest we have forgotten in this era of trillion-dollar budgets and zillion-dollar bail-outs, $3.75 billion is a lot of dough -- more than Microsoft would need, say, for a share repurchase program. So the question on everyone's mind is, what is Microsoft going to do with all that cash?

There are a lot of possibilities because of the number of which Microsoft operates, but one way to narrow down the range is to look at the businesses that Microsoft considers core:

• Windows
• Servers
• Windows Mobile
• Desktop & Productivity
• Enterprise Software
• Search & Advertising
• Entertainment & TV

Windows Mobile There's been a lot of speculation about a Microsoft phone, which the company has consistently denied. But it can't take back CEO Steve Ballmer's words. During a strategy briefing earlier this year, Ballmer said it's "not our strategy to build our own phone... I do think the guys who are in the best position to benefit are the guys who actually have phones at low price points. I think that's a distinct advantage that we have. We have manufacturers who have low price point phones compared to the iPhone."

Note that Ballmer never said Microsoft wouldn't sell a phone -- just that it wouldn't build its own phone. But he didn't hide his enthusiasm for this market, and it wouldn't be outside the realm of possibility for Microsoft to buy a vendor who has "phones at low price points." Microsoft could then ensure that the phone uses the Windows Mobile operating system (naturally) and incorporates other features that could take advantage of applications Microsoft builds down the road.

Motorola's cell phone business could be had for not too much.

Desktop & Productivity The one area where Microsoft could want to beef up its productivity offering is in what it calls unified communications, an attempt to tie main productivity applications like Word and Excel with communications tools like Outlook, instant messenging and telephony. It's the new holy grail for stack vendors like Cisco and IBM as well, and seems to be stuck in neutral. Microsoft had hoped its relationship with Nortel would give it an in with the telecom side of operations, where it has been a relative stranger, but Nortel is in too much trouble of its own to be of any help. Pure-play Internet telephony vendor ShoreTel could be a tempting target, and may be tired of fighting an uphill battle against the marketing power of the likes of Cisco, Avaya, IBM and, of course, Microsoft. And I don't want to dismiss the idea that Nortel could itself be a tempting target.

Enterprise Software Rumors are resurfacing -- yet again -- that Microsoft will bid for enterprise software vendor SAP. But SAP has never given any indication of wanting to be acquired, its $47 billion market cap makes it a rich target, and Leo Apotheker didn't just inherit the CEO's mantle to hand it right over to Ballmer. Moreover, acquiring SAP would require throwing in the towel on Microsoft Dynamics, a suite of financial management applications Microsoft built through a series of acquisitions earlier in the decade. Not likely.

Search & Advertising This is where it gets interesting for many -- but not me. I believe Microsoft will strike some kind of deal for Yahoo, but there's as much wrong with an acquisition today as there was when Jerry Yang was running the company.

Entertainment & TV The one area where Microsoft could really make a splash is in the home, where its hopes of dominating dresser tops the same way it dominates office desktops are being dashed with every Mac and iPhone sold. To get a sense of just how important Microsoft sees this market, read Steve Ballmer's lips:

At the end of the day the real opportunity here is having a device that sits next to or in every television set. I like thing where you can say PC times dollars per PC. Phones times dollars per phone. I dream of someday when I can talk to you about TVs times dollars per TV. You can attach a PC to a TV, that's our Media Center concept. You can put a console next to a TV, that's the Xbox concept. You can put a set-top box next to a TV, that's our Media Room concept. There could be new appliance devices that we or others design that sit next to a TV, that could be part of the equation.

--

MoneyWatch Poll: How Has the Financial Crisis Affected You?