Microsoft faces major market shifts

The Baltimore Sun

I was hoping for more from my shares of Microsoft Corp. Has the company lost its spark?

- C.M., via the Internet

The world's largest software company must bulk up to do Internet battle with Google Inc.

To accomplish this, it is paying a premium cash price of about $6 billion to acquire aQuantive Inc., a leading advertising agency for the Internet that has strong display- and banner-ad technology. That is the largest acquisition in Microsoft's history.

In addition, it recently bought a minority stake in its job-listings partner for an undisclosed amount. While reported talks to acquire Yahoo Inc. have been inconclusive, some type of partnership could take place there, too.

Microsoft Chief Executive Officer Steven A. Ballmer, acknowledging that most of his firm's 150 or so acquisitions since 1990 have been relatively small, has stated, "We are open to large acquisitions."

No wonder. Microsoft was reportedly outbid for the Web ad giant DoubleClick by Google, which paid $3.1 billion. Few major online ad firms were left.

The online ad market continues to grow faster than any of Microsoft's core businesses. Critics believe Microsoft hasn't been waging an aggressive enough fight against Google.

Shares of Microsoft (MSFT) are up 1 percent this year after a gain of 14 percent last year and losses of 2 percent in 2004 and 2005. Earnings rose 65 percent in its most recent quarter, thanks in part to demand for its new Windows Vista operating system. Nearly 40 million Vista licenses were sold in the first 100 days after the Jan. 30 introduction.

The third installment of Microsoft's important Halo video-game franchise is scheduled to be available in U.S. retail stores Sept. 25 and European stores the next day. Fourteen million units of Halo games have been sold, which has driven sales of the popular Xbox and Xbox 360 video-game consoles.

The consensus analyst recommendation on shares of Microsoft is "buy," according to Thomson Financial. That consists of 16 "strong buys," 14 "buys," 11 "holds" and one "sell."

The majority of Microsoft's revenue and profit still comes from its Windows operating system and Office productivity suite.

Yet it must now deal with the trend toward software as a service, in which software is delivered over the Internet and paid for with licenses, subscriptions or advertising. Other challenges are software piracy, regulatory scrutiny and competitors such as Firefox and Linux.

Earnings are expected to rise 17 percent in its current fiscal year ending in June and 15 percent next fiscal year. The five-year annualized growth rate is projected to be 12 percent, versus 14 percent for the application software industry.

I'm not as familiar with the Brandywine Blue Fund as I am with the Brandywine Fund. What's your opinion of it?

- R.R., via the Internet

There is overlap in the two portfolios, which both emphasize growth and trade stocks frequently.

But Brandywine Blue Fund focuses on larger-capitalization companies and owns less than half as many stock names as the better-known Brandywine Fund.

The $2.47 billion Brandywine Blue Fund (BLUEX) gained 18 percent over the past 12 months to rank in the top 40 percent of large growth funds. Its three-year annualized return of 15 percent puts it in the top 4 percent of its peers.

"The fund's managers are great, and it is really a team effort, with about 30 researchers," said Karen Dolan, an analyst with Morningstar Inc. in Chicago. "They talk to management and call company suppliers and competitors to get all the angles on which companies are likely to beat earnings in the near term."

William D'Alonzo has led the team since Brandywine Blue was launched in 1991. That team also runs Brandywine Fund and Brandywine Advisors. Favored are companies with rapidly increasing earnings but also three years of earnings history and a reasonable price/earnings ratio.

Although consistent in its approach, the fund does trade frequently to seek better opportunities and can produce large capital-gains distributions in taxable accounts. Its concentration in some individual stocks also can skew its sector composition.

Technology hardware and industrial materials each represents about one-fifth of the fund, with health care another significant concentration. Top holdings among its 35 stock names recently were Oracle Corp., Baxter International Inc., Comcast Corp., Yahoo Inc., Cisco Systems Inc., Cameron International Corp., Lyondell Chemical Co., Rockwell Collins Inc., Precision Castparts Corp. and Apple Inc.

"Long-term performance has been good, but one caveat is that it had the wind at its back because it owns a greater number of smaller large-cap companies than other large-cap growth funds," said Dolan, noting its composition of 28 percent giant stocks, 41 percent large stocks and 31 percent medium stocks.

This no-load (no sales charge) fund requires a $10,000 minimum initial investment and has a 1.1 percent annual expense ratio.

My elderly mother has only her name on bank accounts. If my name is added, how does this affect the way money is handled at her death?

- R.J., via the Internet

It is OK to add a name on a smaller bill-paying account, but not necessarily a great idea for accounts with large assets.

Once the property is owned in joint tenancy, the names on the account are permanent co-owners. The money automatically passes without probate to the surviving owner.

"I see people adding their kids to investment accounts, and there are reasons why you shouldn't," said Marilyn Capelli Dimitroff, a certified financial planner and president of Capelli Financial Services Inc. in Bloomfield Hills, Mich. "For example, those assets become vulnerable to divorces and lawsuits involving the children."

It is also uncertain that the child will later share the money with siblings.

If you are concerned about paying bills in the event of incapacity, giving one child financial power of attorney accomplishes the same thing, with fewer potential headaches.

Andrew Leckey writes for Tribune Media Services.

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