Congratulations on being selected to run one of the world's largest tech companies. Now break it up so it can become an industry leader again.
"The goal in each investment is to work constructively with management and/or the company's board to implement a strategy or strategies that maximize returns for all shareholders."ValueAct investment strategy.
Pressure from ValueAct Holdings, the shareholder-activist investment group holding a persuasive share of Microsoft (NASDAQ:MSFT) stock, likely played a role in Steve Ballmer leaving. Shareholders seemed to like the news as the stock climbed 7 percent to $34.75.
But, Microsoft analyst Rick Sherlund says about ValueAct: "I don't think they are in it to see the stock go over $35. This is not finished. They want it over $40." They will continue to press for greater shareholder value, together with as many Microsoft shareholders as they can rile up. (The Seattle Times)
Once you've bought back stock and increased dividend to avoid a proxy fight, you'll need to create long-term shareholder value. That means breaking up Microsoft.
How Microsoft divisions are doing
ValueAct Capital concentrates on acquiring significant ownership stakes in fundamentally "good" businesses that are available at depressed valuations. Microsoft still has good fundamentals, but let's take a good look at where revenues come from (and go): (MIT)
|Business Division (Office, SharePoint, Exchange, Lync)||$24.0||$15.7|
|Windows and Windows Live (PC operating systems, software)||$18.3||$11.5|
|Server and Tools (Windows Server, SQL Server, Visual Studio, Azure)||$18.7||$7.4|
|Entertainment and Devices (XBox, Skype, Windows Phone)||$9.6||$0.4|
|Online services (Bing, MSN, adCenter)||$2.9||($8.1)|
The former CEO was committed to becoming a services and devices company. This chart alone casts doubt on that strategy. Consider: (istock)
- Users of Internet Explorer have dropped to 12% of browser share from a high of over 85% in 2000
- 53% use Google Chrome (while 29% use Mozilla Firefox)
- Windows Phone captured a market share of 3.7% in the second quarter, a distant third behind Android's 79.3% and Apple's 13.2%
- Nokia (NYSE:NOK) accounted for 82% of all Windows Phone smartphone shipments during the second quarter of 2013
But, Microsoft is offsetting weakness in its PC business with strength of the non-PC enterprise segments. The company . .
Is moving its installed base to multi-year enterprise licensing agreements (EAs).
Customers are migrating from "one-time" transactional sales to three-year EAs with recurring maintenance fees.
EAs are now 45% share, from 40% last year, and multi-year licensing and subscription contracts have grown 10%+ in fiscal 2014. Karl Keirstead of BMO Capital Markets sees the value of shifting the focus to this company strength - the non-PC enterprise business:
"This is a ~$25 billion annual revenue stream with solid margins, it is not tethered to the PC, and Microsoft is gaining share against rivals IBM and Oracle."
- their share could rise to 35 percent within a year, and
- they have more net new growth opportunity than anybody else.
Microsoft COO Kevin Turner says:
"The growing adoption of our cloud services, including Office 365, Windows Azure and Dynamics CRM, continues to demonstrate our leadership position in the cloud."
Break up Microsoft to grow shareholder value
To get Microsoft innovation leading the world tech industry again, especially in those areas where it's currently weak, you need to break up the company into parts. Focused, scaled divisions will allow the tech behemoth you now run to compete with its more nimble rivals.
Here's the breakout:
- Operating systems to run Windows and capitalize on business applications built on it.
- Desktop applications to maintain and improve applications customers worldwide rely upon.
- Server applications catering to business customers.
- Entertainment for XBox and game designers.
Which leaves the online division to sink or swim. Microsoft never had any business running a travel agency (Expedia) or a cable news network (MSNBC). Maybe it doesn't need to be running a search engine or a consumer e-mail provider either. (MIT)
All you have to do as new CEO of Microsoft is to simplify with a radical restructuring.
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.