What Does Reorganization Mean For Microsoft?

| About: Microsoft Corporation (MSFT)

Last week, software goliath Microsoft (NASDAQ:MSFT) announced that its long-rumored reorganization plan has been finished, and the details are now available to the public (via an internal email from CEO Steve Ballmer). Some companies seem to go through countless "reorgs" and the actual impact of such changes can often become obfuscated without ample evaluation and monitoring. The new Microsoft will have 4 engineering organizations, included within a total of 12 business functions.

First of all, we think the premise of Microsoft's reorg is spot on. The company is dividing into a dozen teams, but the logic behind the new teams looks sound. Perhaps the most obvious takeaway from the reorg is that individual devices such the Xbox cannot be looked at as individual and separate anymore. As such, Microsoft has created an Operating Systems Engineering Group where the smartphone, PC, tablet and TV will all likely be worked on together to provide an integrated experience. Sound familiar? This is a lot like what Apple (NASDAQ:AAPL) does with the ease of use between its iPhones, iPads, Macs and Apple TV. Microsoft would love to replicate such an experience across the Xbox, Windows Mobile, Surface and PC, but we think it might be more difficult to accomplish because Microsoft doesn't always integrate hardware and software. Nevertheless, this move is in the right direction.

All devices will be made under the same umbrella within the Devices and Studios Engineering Group. The Xbox, Surface and future products will be led by Microsoft veteran Julie Larson-Green. This may not seem like a big deal - remember Windows and Office are still the company's largest profit centers - but Ballmer previously outlined his aspiration to make Microsoft into a devices and services company. After leading Windows following Steven Sinofsky's departure, Larson-Green will jump to the forefront of what is now seen as the future of the company, which will give her an impressive breadth of experience. This matters because many see her as the heir-apparent to Ballmer's throne. Therefore, we'll pay special attention to the unit to see what new devices come to fruition. This unit will also house the studios project, which could become a bigger part of Microsoft after the introduction of Xbox One.

The Applications and Services Engineering Group essentially combines the efforts of Bing, Skype, Internet Explorer, Office and other applications. We doubt much will change, as Applications and Services head Qi Lu already led Microsoft's Online Services Division. However, Lu will now have the highly-profitable Office business under his watch, which could help mask the losses suffered by Microsoft's Online Services Division. All of the previously-mentioned web applications will be critical to Microsoft's future in computing, but we think of them as more complimentary than leading products. However, the division will also have to fend off increasing competition from Google (NASDAQ:GOOG) to make its mark in the enterprise productivity application space.

Microsoft's final new engineering segment, the Cloud and Enterprise Engineering Group, will be led by Satya Nadella, who previously ran Servers and Tools. We doubt much will change in this area either, as SQL, Windows Server and Visual Studio are all Microsoft stalwarts. In fact, Cloud and Enterprise computing has been one area of strength for Microsoft during the past several years.

Our Take

Since the Microsoft reorg doesn't involve thousands of layoffs or new cost synergies, we doubt it will have much financial impact in the near term. Frankly, it could take years to figure out whether the reorg is successful or not. Still, we can't help but think the move will be a positive, if not simply for the fact that it acknowledges the shift toward device integration. Our valuation remains unchanged, but shares of the tech giant remain a bargain, and we continue to hold the name in the portfolio of our Dividend Growth Newsletter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: MSFT, AAPL, and GOOG are included in our actively-managed portfolios.