Managing all those zeroes: a look inside Microsoft's treasury; As Microsoft Corp.'s vice president and treasurer, George Zinn's role is not different from that of many of his peers who manage their company's assets and juggle multiple responsibilities--except, perhaps, as it relates to scale: Microsoft has $49 billion in assets to manage.
The risk function at global software giant Microsoft forms an umbrella over all the treasury groups, and looks at financial risk (the risk treasury creates through its investing activities) and business risk, such as directors' and officers' risk or earthquake insurance. (Microsoft has facilities on three fault zones--one each in Japan, California and Washington.)
Zinn spoke recently with Financial Executive Executive Editor Ellen M. Heffes about treasury's role and how it operates at the Redmond, Wash.-based company, with a recent market cap of $280 billion.
While still under age 40, Zinn stepped into his current role in early 2004. He joined the company in 1996 as a financial analyst, became assistant treasurer for four years and then became CFO of the Intellectual Property & Licensing division, where he helped launch outbound licensing of IP seeded by the approximately $7 billion annual R & D budget. When offered the treasurer spot, he says he "voted with his feet," and applauds Microsoft's policy of providing career growth and opportunities for its employees.
When Zinn talks of the firm's worldwide treasury function, he refers to "the life-cycle of a dollar--all the way from when Microsoft first touches it, to the investment phase." This cycle begins with the treasury's Credit and Collections group (the majority of which is based in Reno, Nev., and is responsible for all aspects of a typical credit function--customer analysis and managing the accounts receivable line). Next in the process is the Global Cash Management and Treasury Operations function (GCMTO), which manages all of the entities, subsidiaries and worldwide bank-account relationships. This division, he says, is responsible for literally getting the cash into concentration accounts for investing purposes--whether it's a dollar or foreign-sourced currency translated into a dollar.
Following GCMTO is the Capital Markets function, which is responsible for investing in a very prescribed manner in order to enhance returns while minimizing risk. Zinn is quick to add that, "obviously, all the functions work closely with the others."
While some tout the higher visibility of today's treasurer role, especially in the Sarbanes-Oxley era, Zinn believes that the important aspects of risk management, if performed well, should lead to less visibility. In fact, he observes, "The only time that you are probably talking about an issue is because it wasn't previously mitigated." As such, he aims for lower visibility.
"My goal is to not increase any visibility in my role relative to risk management, but only to have conversations about what we are doing prospectively to manage risk in a framework that we have identified."
That framework includes using various methodologies, including a Monte Carlo simulation and extreme scenario simulations. Also, Zinn says, his team identifies tail risk as well as expected risks that are incurred, and ranks and prioritizes these relative to the business segments. The group then works with the business segments to mitigate risks prior to the expected outcome occurring.
That area of risk management is separate from complying with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework that supports Sarbanes-Oxley requirements. "The definition of risk management has taken on a life of its own," Zinn says, referring to the framework necessary to document internal control processes. As such, he says enterprise risk management likely means different things to different people. He notes that Microsoft completed its first reporting cycle for Section 404 as of its June year-end and did not report any material weaknesses or significant deficiencies.
Technology Drives Activities
As one would expect, Microsoft is at the forefront of utilizing new technology--its own, as well as other products--to optimize its treasury operations. Indeed, Zinn says treasury used the company's 64-bit Windows technology before it was shipped to customers last year. As a result, he proudly reports the time required to run its risk-analysis software was shaved from 40 hours to 13 hours.
Using technology, Zinn is concentrating on value-add activities. For example, the process used for year-one Sarbanes-Oxley Section 404 compliance has become a target for such improvement. He explains that Microsoft used an end-to-end process for its documentation, and the result of that process became an opportunity to make Sarbanes-Oxley something that is not a "tax," but a value-add.
Following those efforts, he says, treasury is now "reviewing that process and looking at how we can make improvements from both an overall business-process perspective and also in a way that permits our people to spend time on value-added functions versus transactional ones."
In addition, a big initiative this year is to implement a SWIFT.NET system that allows Microsoft to interface with its banks around the globe. "We're going to reduce the number of systems and data silos currently in operation and leverage the standardization that SWIFT presents on the data." In doing so, he expects to put his people in the position "where they are not spending most of their time transposing or keying information, but actually analyzing it." (Editor's note: SWIFT is the industry-owned cooperative supplying secure, standardized messaging services and interface software to over 7,800 financial institutions in more than 200 countries.)
In essence, Zinn says he's showing people that using Microsoft's tools and applications can make their lives better. "I don't think there's anything more powerful than people not just talking about how these things can solve problems and create solutions, but to actually do it," he declares. So, who says finance people and marketing people don't mix? You can just sense a bit of the marketer in this finance guy.
Indeed, he says technology allows him to look at foreign exchange exposure across the company--whether or not an exposure is occurring because it is entering into a partner agreement in another country, or entering into an international investment in the treasury or deciding to bill in a local currency or not.
"We're aggregating our Fx exposure in a way that people [without proper technology] can't generally look at it, because of a lack of visibility across various functional silos." And, he adds, the investment approach reflects that. "What we will do from a treasury perspective is assume some of the exposures are a given, and modify our investing style accordingly to come up with the risk / return profile we have vetted with our board of directors and is appropriate for the overall company's risk profile."
Investing Microsoft's Treasury and Strategic Portfolios
So, how does Zinn deal with such activities as Federal Reserve interest rate hikes? The way he explains it, by the time the Fed's move is announced, his response is already made. "We already know how we are positioned [prior to an announcement]; waiting for the announcement would be reactive."
The way Microsoft manages its treasury portfolio--separate and distinct from its strategic portfolio--is by investing in a well-diversified fashion, holistically.
"The approach to thinking about holistic balance sheet management looks at what asset classes we should add to the treasury portfolio that would increase returns and reduce risks," he explains. For example, a few years ago, international equities were added.
"If you look at international equities--in and of themselves--that's a relative risky asset class," he says. However, when you take the overall balance sheet and look at the predominately U.S. fixed-income exposure in the treasury portfolio, the predominately U.S. high-tech exposure in the strategic portfolio and combine that with the overall "expected outcomes from a Markowitz-model perspective, adding a small amount of international equities," he says, actually increases the Sharpe ratio. The result of investing in this way has been increased returns with decreased volatility.
Additionally, Zinn notes something new--and just announced in the market risk section of Microsoft's most recent 10-K--is the commodity risk in its portfolio. "If you look at the numbers, they are relatively de minimis," he says. But, he adds, "The theory is that we are managing this in a diversified total-rate-of-return fashion and adding asset classes that potentially reduce exposure in a rising interest rate environment, and from an expected return perspective, increase the Sharpe ratio." He infers that this ought to be some of the thinking that goes into portfolio design.
Indeed, portfolio design is part of the plan, while the overall capital markets policy falls under the firm's tactical asset allocation. Zinn believes Microsoft has a pretty interesting approach to asset allocation. "We have approved benchmarks for not only each of our cascading levels of management, but also our portfolio managers, and within those benchmarks are certain risk attributes."
He says his group uses a one-day value at risk (VAR) approach, which provides a view of the deviation or relative deviation from those benchmarks. As such, he explains, "various portfolio managers are empowered to deviate a certain amount from their individual benchmarks, as is the assistant treasurer, as am I, as is the CFO."
The deviations are referred to as the "green zones." When the deviation falls from the green zone, however, the scenario changes. "To the extent we are in the yellow zone, it requires the treasurer's [his approval]; to the extent we are in the red zone, it requires CFO approval."
Basically, Zinn describes the approach to interest-rate management as "a function of the overall CFO, as well as the treasurer, as well as the assistant treasurer's perspectives on interest rates." Indeed, he says, it's "liquidity management combined with interest rate bias."
To answer the question of just "what is Microsoft planning for its cache--that well-publicized $40 billion or so in cash that it is sitting on?" Zinn rattles off several activities. In his first year as treasurer, Microsoft announced a $30-billion share buy-back over four years combined with a one-time $3-per-share dividend to shareholders; and it also moved the dividend at the time of the annual dividend to a quarterly and doubled it. Making such decisions, he says, is somewhat of a group effort.
More recently, in October, Microsoft announced a plan to accelerate the remaining portion of its previously announced stock repurchase program. Zinn comments that the goal "is to execute the $19 billion remaining under our buyback plan twice as quickly," finishing no later than December 2006.
The way Zinn describes it, a lot of time is spent modeling and talking to senior management--the CEO, CFO and board or directors--about the appropriate levels of liquidity throughout the business, given current situations and opportunities, as well as threats or risks. Prior to the capital deployment of that $75 billion over four years (a percentage of the special dividend was not cashed in by investors, thus providing additional float and benefits to all investors), he says the company had gotten into some advanced thinking in this area and has spent time with not just practitioners but also with academics.
He argues that there is a disconnect on capital structure theories with practitioners, because "there is a clearly different implementation from what corporate finance theory would suggest." Look at the high tech or pharmaceutical arenas, he says, and you see a lot less leverage than the textbook theory would suggest. He believes that over time this will be reconciled.
Zinn offers the example of Chrysler Corp. to clarify his theory. At one time, Chrysler had a tremendous asset base prior to its missing a couple of "product shipments," which he notes is analogous to the technology sector. As a result, it found itself in a position where the capital markets dried up and were not available for it.
Chrysler would ultimately have had to declare bankruptcy--a bit of a misnomer these days, relative to the airlines and other bankruptcy experiences, he quips--but really going out of business was the next step, had the government not stepped in with a bailout. Following the buyout led by fabled CEO Lee Iacocca, Chrysler was able to invest and catch the next two product cycles, and became a thriving business again.
The lessons learned, Zinn explains, give perspective on how Microsoft approaches its thinking and modeling associated with the appropriate amount of leverage or capital structure for its business.
Bottom line, to gain insight into what Microsoft's treasurer might be focused on, on any given day, Zinn comments: "From an overall perspective, treasury is focused on becoming more of a strategic asset for the company." Using the life-cycle of the dollar concept, he says, his goal is to accelerate the velocity of a dollar through the Microsoft ecosystem by leveraging its technology. He views this as a "prescriptive approach to driving improvement in working capital from a treasury perspective."
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|Author:||Heffes, Ellen M.|
|Date:||Dec 1, 2005|
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