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Smooth Operator

Behind every news-making Microsoft deal stands its soft-spoken, hard-bargaining CFO.

“He’s funny, honest, and easy to be around,” says Leo Hindery, who as president and CEO of AT&T Broadband & Internet Services, in Englewood, Colorado, spent days negotiating the AT&T deal with Maffei. On the other hand (and with apologies to Hindery), Maffei admits that he uses humor as a means of disarming his negotiating partners.

Maffei also seems to have disarmed critics of Microsoft’s accounting practices. Twelve days after telling CFO that the SEC had signed off on its deferral of revenue, but a month before this issue went to press, Maffei held a conference call with analysts and the press and announced that the company had learned “sometime during the past few months” that the SEC had launched an inquiry into Microsoft’s accounting. If the SEC challenges Microsoft’s deferral of revenue, the company could find it more difficult to smooth out earnings volatility. But in the conference call, Maffei said the inquiry would not have a material effect on the company’s results, and the stock barely budged on the news. Smooth indeed.

Maffei, however, does have his detractors. Some analysts contend that Microsoft overpaid for WebTV, for example, when it spent $425 million in 1997 for technology designed to provide TV sets with Internet capability. Reportedly, Microsoft initially expected to have somewhere between 2 million and 3 million WebTV subscribers by now, but so far the company has managed to sign up less than 1 million.

But on closer examination, the WebTV deal may be less expensive than it seems. Microsoft wrote off nearly 70 percent of the purchase price as in-process research and development. Although the SEC has been cracking down on such write-offs, Maffei says Microsoft’s accounting for the acquisition passed SEC muster.

Other analysts complain that Maffei didn’t get as much as he should have in the AT&T deal. They note in particular that Microsoft’s contract to supply software for the set-top boxes is nonexclusive. But both Maffei and AT&T’s negotiator point out that Microsoft did not seek exclusionary terms, and that it wasn’t all that critical to have done so. “[The deal is] de facto important, if not exclusive,” says AT&T’s Hindery.

Also, it might have been unwise for Microsoft to demand exclusionary terms when such arrangements rank high among the business practices being challenged by the Justice Department. Maffei agrees: “If Microsoft and AT&T were to do an exclusive deal, you’d have to be deaf, dumb, and blind not to notice.” But he adds that Microsoft would have sought the same terms for the deal even if it weren’t an antitrust target.

To Be Remodeled

More broadly, Maffei says the focus of Microsoft’s dealmaking isn’t on short-term financial returns but on strategic benefits down the road. An extra million dollars here or there is beside the point: “People don’t pay us a multiple of our capital gains,” he remarks. Hindery, for one, supports this view. Referring to the AT&T deal as well as other investments and acquisitions that Maffei has overseen, Hindery contends that “these companies aren’t just good deals, they’re good businesses.”


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