Microsoft Corporation (NASDAQ:MSFT) has many issues to contend with at the company's current size and complexity. Among them is the disparity of its growing line of products; the lower profit margins offered by hardware sales in comparison to its traditional high margin software sales; and the increased number of formidable competitors it faces in every direction it looks.
This is the continuation of Monday's story Micro'soft' vs Micro'hard' -- Break it up fellas! In the first article I touched upon the scale of Microsoft and their lack of agility. I concluded that even several tremendous successes (swallowing Apple (AAPL) whole was used to exemplify) would only have marginal affect on the share price in the aggregate.
This story is not about whether Microsoft makes worthy products, or is inventive, or can create the next big thing. This is about what Microsoft is, and what it should be as a company going forward. Does Microsoft want to get back to its high-growth days and generate the kind of excitement a Google, Inc. (NASDAQ:GOOG) or MySpace (recently acquired by Newscorp (NYSE:NWS)) does, or do they want to be a large conglomerate. Given the number of new products that are announced weekly, and all the unfinished business the company has started, it is apparent that the die has been cast for the latter; it is a conglomerate.
Conglomerate \Con*glom"er*ate\, n.
Webster's: That which is heaped together in a mass or compacted from various sources; a mass formed of fragments; collection; accumulation.
OR
Three successful conglomerate models:
Berkshire Hathaway Inc. (NYSE:BRK.A): This is an aggregation of many companies, selling basic products in stable industries, acquired by the Buffett / Munger brain trust over a long period of time. It is a holding company that keeps each of its acquisitions intact as a separate operating company, with strong management, good cash flow; each maintaining virtual autonomy. This model is not even a possibility for Microsoft.
General Electric Company (NYSE:GE): This old company has made itself over many times, altering the mix of enterprises as management strives to maintain its first or second ranking in each business according to the plan installed by Jack Welch over two decades ago. Therefore GE no longer makes transistor radios, but it does have a division that makes medical imaging equipment, and another that makes jet engines. The company also makes water filtering equipment and offers services in water resource management and infrastructure. Each division has its own business plan but sticks to the Six Sigma corporate philosophy. Being that each division is semi-autonomous and large in its own right and that most of the divisions have significant barriers to entry, this model is better, but still not a good fit for Microsoft; the biggest control freaks on the West Coast. (...well...maybe tied with Disney)
Johnson & Johnson (NYSE:JNJ): The most respected company in America might be the best model for Microsoft to follow, or anyone else. J&J has an illustrious history, strong management, strong brand recognition, great cash flow, and a diversified portfolio of 2000 products. Owning J&J is almost like owning a high quality mutual fund without all the trading costs and taxes. The company is very "user friendly," which, at times, Microsoft has not been. Ballmer & gang could learn a lot from J&J about managing a multitude of products and people. This seems more than Microsoft can handle, but who knows, maybe after 100 years.
What's next? Size alone is not the reason to break up the company. Slower growth should not be the reason either. To me the reason to break up Microsoft is that all the pieces do not complement each other and, in some ways, hinder each other. In addition, breaking up the company does not mean it will "get small". It might even make very good sense for Microsoft to stay large, but swap out some of the pieces and aggregate some others. It could form, perhaps, several large companies, but each would need to be more distinct, more focused and with clearer vision. This is the direction I am leaning toward as I think through the situation.
Disclosure: I own shares of Berkshire Hathaway (BRK.B), and Johnson and Johnson (JNJ) but have no position in any company mentioned here, long or short.
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Reader Comments (Page 1 of 1)
10-02-2006 @ 12:13PM
Rama Sod said...
They probably should have done this move back in 2001, at the turn of the Millennium / Century. They should have renamed themselves ME-2 (pronounced "Millennium Experience Two" or "Me too" for short).