Dear Mr. Berko:

G.K., Gainesville, Fla.

Dear G.K.:

There was a time when Microsoft Corp. (MSFT-$31.41) considered purchasing Yahoo Inc. (YHOO-$14.65), and at that time, it would have been a disaster. The cultures of the two companies (YHOO has none) are as different as cheese and chalk, and fortunately for MSFT, Jerry Yang (Yahoo’s ex-CEO and founder) nixed Microsoft’s $48 billion offer in 2008.

But for that, MSFT’s Steve Ballmer would be pulling out what remains of his hair working with Yang, whose personality spans five octaves. Now that YHOO’s current market value is $18 billion, Yang’s astrologer encouraged him to resign, and certainly the sycophants on the board also see the signs.

Since Yang flapped his wings and flew the coop, MSFT could score a coup and buy YHOO for $25 billion less than it would have paid four years ago. Microsoft can’t just mosey along, protecting its $59 billion in cash reserves, while Apple, Google and Facebook steal the applause. For all of YHOO’s troubles, including a gormless board of directors with a median IQ of 62, the company “is still a stunning group of Internet assets, with a massive reach of almost 700 million unique users,” according to The Wall Street Journal’s MarketWatch.

Frankly, Ballmer needs to get the pennies off his eyes and make a bold move, because he can’t afford to let someone else buy Yahoo. The failed 2008 merger encouraged YHOO to work a deal that made MSFT’s Bing the search engine for all of YHOO’s sites. Microsoft needs the traffic from its Yahoo connection, and a merger with another company would ruin the search partnership, which is something Microsoft does not want to lose.

I became disenchanted with MSFT during the ongoing “tech wreck” in 2000, when the shares were trading on a split-adjusted basis in the mid-$50s. There were 10.5 billion shares outstanding; revenues were $21 billion; book value was $4 per share; earnings were 84 cents a share; return on shareholders’ equity was 21 percent; and the stock traded at (hold your nose) 65 times earnings. Since then, management has repurchased 2.5 billion shares; book value has doubled; earnings have tripled; return on shareholders’ equity has doubled; and the MSFT dividend has zoomed to 80 cents a share, yielding 2.5 percent.

So for the first time in more than a dozen years, I would encourage you to buy Microsoft. There’s very little downside from here and lots of upside, but it’ll never trade at 65 times earnings again.

In the past, those who were recommending the stock were tilting at windmills. Not now! Consider MSFT’s double-digit earnings growth, its $23 billion in free cash flow, its $59 billion cash hoard, its huge installed base of 350 million Windows 7 licensees, and its 750 million users of Microsoft Office software. The dividend, which has increased fivefold since inception, could possibly double in the coming four years.

But the real juice should derive from Windows 8 (it will be out in October), which surprisingly created an enormous buzz at the recent International Consumer Electronics Show. Windows 8 will drive sales of a new breed of super-lightweight laptops with touchscreens powered by next-generation Intel chips.

I think MSFT could trade in the low $60s by 2016, and the dividend could rise to $1.40 a share. Flip a coin – heads, you buy it, and tails, I would, too.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. © 2012 Creators.com