Microsoft Corp is expecting a boost this quarter from a rebound in business tech spending, likely outweighing negative effects from turmoil in Europe, the software giant's chief financial officer told Reuters on Friday.

The broad recovery in the economy and rising share prices will encourage more technology mergers and acquisitions, CFO Peter Klein told the Reuters Global Technology Summit in New York, but the world's largest software company had no mega deals planned.

Microsoft, with $39.7 billion in cash and short-term investments on its balance sheet, will stick to its dividend and stock buyback policy while waiting for clarity on tax rates, said Klein. He did not rule out another special dividend like its $30 billion-plus, one-time payout to shareholders in 2004.

We're heading into our fiscal fourth quarter which is typically our biggest quarter for enterprise sales, and we're very optimistic about the opportunity there, said Klein, who took over as CFO last November. For the next 12 to 18 months you'll see a gradual return to growth in IT spend.

Microsoft is hoping that companies will make the long-delayed move to replace aging computers as the economy improves, taking the opportunity to adopt its new Windows 7 operating system and Office 2010 suite of programs.

In our last fiscal quarter, we saw for the first time (since the downturn) growth in businesses' spending on hardware, both PCs and servers, which we thought was a very encouraging sign, said Klein. I've been out on the road this week, talking to a lot customers, talking to a lot of our sales people -- and it feels like things are loosening up a bit.

Analysts are backing Klein's optimism, expecting $15.2 billion in sales for the company this quarter -- which ends June 30 -- up from $13.1 billion a year ago, according to data from Thomson Reuters I/B/E/S.

Economic problems in Europe could be a blot on the horizon, said Klein, but would likely not drag down the U.S. recovery.

To the extent there is fiscal austerity that constrains overall economic growth, it's fair to think that might provide a headwind to IT spend (in Europe), he said.

M&A WAVE BREAKING

The recovery will bring with it a new rash of deals, said Klein, as potential acquisition targets start to see the premiums that were absent during the market downturn.

The stock market has clearly rebounded, so you sort of feel like you're back to equilibrium, said Klein Over the course of the next couple of years you'll probably see a pickup in (M&A) activity compared to the last year and a half.

Microsoft makes dozens of smaller deals each year, mostly under $250 million. Klein said the company is unlikely to do a mega-acquisition, two years after its failed $47.5 billion bid to buy Yahoo Inc .

They are very hard to do, said Klein.

Tech deals are on the rise this year, with Hewlett-Packard Co slated to buy Palm Inc , and Germany's SAP agreeing to buy database software maker Sybase Inc for $5.8 billion.

Microsoft isn't interested in launching a counter offer for Sybase, said Klein, nor is it looking to buy SAP -- the world's top maker of business management software for large corporations -- after looking at such a deal about five years ago.

WAITING ON DIVIDEND TAX

Microsoft, which handed more than $30 billion to shareholders in a special dividend in 2004, has no plans to repeat such a payout, but has not ruled it out.

There is nothing under consideration now that is different than what we've been doing in the last several years, said Klein, when asked about a special dividend.

Microsoft started paying an annual dividend in 2003 and moved to quarterly dividends the year after, as it looked to channel more money back to shareholders as growth rates moderated.

Taxes on dividends could almost double to 40 percent next year for top-bracket taxpayers if tax cuts enacted by the Bush administration are allowed to expire.

We want to get their (investors') feedback on dividends, buybacks, and how tax policy may affect how they feel about that, said Klein. We wouldn't do anything in anticipation of potential legislation. We'll plan for it, but won't do anything until there is any actual change in the tax policy.

(Additional reporting by Jim Finkle and Paul Thomasch, Editing by Derek Caney, John Wallace and Leslie Gevirtz)

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