Microsoft: The Destruction Of Shareholder Value -- A Failure In Corporate Development

| About: Microsoft Corporation (MSFT)

Microsoft used to be the dominant force in technology. Now, it just reacts to the market. Does it lack strategic vision? For example, look at Microsoft's initial reaction to the Smartphone: "the Kin."

According to an article in Business Insider on November 13, 2012, the executive responsible for the development and roll-out of the Kin Smartphone now advises Steve Ballmer and Peter Klein on Corporate Development Strategy. Not trying to disparage anyone, but if this is true, Microsoft needs help with Corporate Development.

After the government prosecuted Microsoft for anti-competitive behavior, the company lost its strategic vision: "a Microsoft Operating System on every computing device." The government's, anti-competitive prosecution had merit, because the original vision had a flaw in it. Monopolies stunt human development at the end of the day and free markets demand healthy competition.

The anti-competitive complaint against Microsoft was filed by the U.S. Government on May 18, 1998. On 12/31/1999, Microsoft (NASDAQ:MSFT) had a market capitalization of approximately $601 billion. On 12/31/1999, Apple (NASDAQ:AAPL) had a market capitalization of $17 billion. Google (NASDAQ:GOOG) had a market capitalization of ZERO. Compare these values to the current market capitalizations: MSFT $276 billion, AAPL $420 billion and GOOG $275 billion.

In other words, Microsoft lost $325 billion in market capitalization since 12/31/1999. But Apple gained $403 billion in market capitalization, and Google gained $275 billion during the same time period. This illustrates an opportunity cost for Microsoft of approximately $1 trillion.

The question for every investor: Does Microsoft lack a clear, comprehensive, strategic-vision for Corporate Development?

Incredibly, Microsoft still possesses the most attractive assets within technology, including Apple and Google. Sadly, however, Microsoft hasn't recognized this value yet. As an investor, you have to question the corporate development strategy because it significantly under utilizes the incredible capital of Microsoft, both intellectual and financial.

The bottom line: Microsoft makes its money by selling the operating system and the applications. However, Google has taken the opposite approach: give away the operating system and the applications - make your money by providing the services.

Microsoft must fight fire with fire. To counter Google's strategy, Microsoft must basically give away the services through the operating system and the applications. In other words, let the service provider retain the economic benefit for providing the service through Microsoft's operating system and applications. The retained economic benefit will then create a natural incentive in the market for the provider of the service to develop the service using Microsoft's operating system and applications.

After World War II, in order to more effectively rebuild their country, the Japanese formed deep operating relationships within their respective supply chains. They accomplished this deeper affiliation through cross-ownership positions. And by introducing equity into the relationship, the organizations were able to foster a tighter collaboration because the interests were aligned within the relationships.

Microsoft needs a clear, comprehensive, strategic-vision in Corporate Development.

According to the latest 10-K, Microsoft allocates roughly $10 billion to equity and other investments. The remaining $65 billion is allocated between cash and short term investments. This is a very conservative asset management strategy. The market should demand bolder action.

Microsoft should allocate a portion of its cash and short-term investments to specifically form deeper, strategic relationships within its supply chain. Deeper relationships naturally produce significant synergies, which enhance the benefits of vertical integration. Microsoft already applies this theory - but only to small, bolt-on acquisitions. This theory / strategy must be applied to a broader target. It must include key, strategic, publicly-traded companies.

The key to the strategy is the structure of the equity investment. Through structure, Microsoft could effectively take control of an organization without actually acquiring the organization. The "threat" of ownership aligns the interests and produces the synergies. But Microsoft's agenda only involves building the relationship to produce the synergy which creates the shareholder value.

Microsoft! Instead of just allocating capital according to traditional portfolio management:

1. Why not use a modern, portfolio-management strategy designed specifically to develop the Microsoft Corporation?

2. Why not allocate a portion of capital to specifically develop the corporation through deeper relationships within its supply chain?

As an investor, I need your help. Microsoft needs to hear my corporate-development strategy, using modern portfolio management. It would create significant value for the shareholders of Microsoft.


Ken Copley

Capital Executive LLC

Disclosure: I am long MSFT, GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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