A Practical Approach to Risk Management at Microsoft
An Interview with Patrick Boyer, Group Manager, Treasury Controllers Group, Microsoft Treasury
In this interview, we discuss with Patrick Boyer, Group Manager, Treasury Controllers Group how Microsoft has addressed some of the challenges of hedge accounting by implementing Reval®.
Introduction to Microsoft
Since Microsoft was first founded in 1975, it has become one of the world’s most respected companies and recognised brands. The company is centred around five business segments across client and server solutions, internet tools, business services and entertainment, with nearly 96,000 employees across 107 countries. In 2008, Microsoft achieved revenues of $60.42bn, an increase of 18% on the previous year, and net income of $17.68bn, representing growth of 26% on 2007. With complex cash and risk management requirements, and a diverse, fast changing business, Microsoft Treasury has a strong commitment to effective, practical risk management to protect the needs of the business and its shareholders.
How would you describe Microsoft’s approach to risk management?
Microsoft has an experienced treasury team with substantial experience in cash and risk management. Due to the large volumes of cash which the company often holds, treasury’s investment policy and risk management strategy is quite conservative, with liquidity and security being the most important drivers.
Cash needs to be available when required by the business for activities such as acquisitions, and in particular, returning cash to shareholders, such as the special dividend and share buyback announced in 2004. Once we have ensured that a sufficient proportion of the cash portfolio is available to support our business needs, we may seek a higher return on the remainder, but this is not a primary objective and security of capital remains a priority.
Microsoft treasury has a strong commitment to effective, practical risk management to protect the needs of the business and its shareholders.
As a global company, FX risk must also be a major consideration. How do you hedge these exposures?
Absolutely - due to the breadth of our international activities, Microsoft has considerable exposure to FX risk. We bill and collect cash primarily in the G10 currencies, but we are exposed to other currencies too. Consequently, minimising the effects of FX rate fluctuations is paramount. We have a hedging programme in place which involves using FX options to layer in hedges against our cash flow forecasts over 2-3 years. We hedge only a portion of our risk and act with a high degree of caution, particularly as the accuracy of forecasting and associated hedging must be very accurate under FAS 133. Wherever possible, we take advantage of natural hedges between foreign currency revenues and costs, to minimise our external hedging activities.
In addition to external hedging, we also have intercompany exposures created at the business unit level, resulting from activities such as cash pooling in foreign currencies. Under FAS 52, we need to measure FX translation gains and losses against the business unit’s functional currency. This can create a range of exposures, and therefore intercompany hedging requirements.
We are informed of FX exposures by the businesses which send cash flow forecasts via the CFO. We then leverage this forecast information to create our hedging programme. The number of contracts is far too high to contemplate individual contract hedging, so we perform cash flow hedging at a macro level.