Microsoft Corporation (NASDAQ:MSFT) is now a bloated company. Naturally, not all of it is bad. But, at the company's current scale, there are issues to contend with that might be more easily resolved in leaner and meaner pieces. This is the first in a two-part story.
We all would love to be bloated by Microsoft's cash hoard, patents, growth history, depth of management, research & development strength, and certainly the company's potential to bring product to market.
Nevertheless it is time to consider Micro'soft' vs Micro'hard'. The development of the XBox, and now the Zune -- and with the possibility of Microsoft stores in the air -- make this a timely consideration. I am not promoting breaking up the company without very deep and measured analysis of the merits (Peter Cohan had some analysis of this very topic, in June), but given Microsoft's size and slower growth prospects it is worth considering.
The break-up of many of our largest corporations has been a topic of discussion as investors seek to maximize company potential.
- Citigroup (C) see: Citigroup CEO rejects notion of break-up -- Barron's
- General Electric (GE), was in the news as early as 2000 regarding a break-up General Electric | Solving GE's big problem | Economist.com and given there stock performance since that time there are many people that probably think it should have been done and still do.
- Time Warner (TWX) was recently discussed by Doug McIntyre & Jon C. Ogg in their own realm reviewing James Cramer's thoughts and most notably Carl Icahn announces his plan to remake Time Warner - Feb. 8, 2006
But, Breaking Up is Hard to Do after many careers have been spent creating a colossus of a company. There are examples of companies that have split up successfully (or divested their interests in spin-offs) and some that have not added value. Beyond the economic analysis, there are questions of timing, and egos can match a company's vast scale, hampering clear thinking. That is why the calls for break up often come from outside the company; where only the financial considerations are in play.
When Microsoft was in litigation with the Federal Government on anti-trust charges there were many scenarios under discussion which might have lead to the break up of the company. But what about today?
Today Microsoft is that huge aircraft carrier that has lost its agility. Like our other two Super Cap BloggingStocks companies, GE and WMT, it has gone down over the last few years. Sure, with the company's famous R&D strength and cash, it can bring products to market relatively quickly; like the Zune. However the Zune is an afterthought in a market created by others, without the potential to raise company valuation significantly. The stock closed Friday at $26.85 with a market capitalization just shy of $268 billion.
They would have to create 10 new successful products to push the stock value up much. Keep in mind that with all of its recent success Apple Computer, Inc. (NASDAQ:AAPL) closed Friday with a valuation of $63 billion. If Microsoft could thrash Apple over the next five years and swallow its value whole, the combined company's growth would average less than 5% a year. That's horrible!
To be continued tomorrow...
Disclosure: I have no position in any company mentioned here, long or short, except for Time Warner (TWX).
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Reader Comments (Page 1 of 1)
9-18-2006 @ 10:08PM
richard mitchell said...
the trouble at Microsoft is the company is strictly a "2nd mover"; taking the innovations and new products of another company ,make a few changes and then market it...I can never see Microsoft making 10 "new products". They are depending upon the genius of apple and google and others to be the innovators and "1st movers...... best Mitch
9-19-2006 @ 9:12AM
confidential said...
The lack of agility due to MS size is one thing, and I am not so sure GE can be called on the carpet for its lack of agility. Microsofts behavior and internal management discipline would appear to be 180 degrees from GE and or Walmart where failed or not profitable enough ventures are fixed closed or sold. Microsoft goes on for years with failed ventures that are just hurting the margins of their competition. What has been the total return of the games business or MSN for shareholders? The Zune is not designed to move the stock or enhance shareholder return, it is at best another plate spinning in another market and, at worst an attempt to lower Apples margin/stock price. This is Microhard with my/stockholders money. The stock would go up about 30% if they announced transparent positive financial objectives for each business and said they had X quarters to get there, or else they would be sold.