A Microsoft Break-Up Could Unlock Its True Value - Barron's

With its Xbox/entertainment device unit accounting for 13% of Microsoft's (MSFT) FY2008 revenue, Barron's Mark Veverka argues that Microsoft's $28 share price undervalues the unit. "This is not a typical activist investment idea," one analyst notes. "Nevertheless, I think it is useful to look at what the value of Microsoft's separate businesses are. This may indicate that management is pursuing a flawed strategic course."

Taking the spin-off idea one step further, the money-losing online services accounted for just 5% of annual revenues and for minus-38% operating margins. Spinning off the online-services division would allay shareholder fears about sinking money into a black hole.

Breaking away both the Xbox/entertainment division and the online services division would bring Microsoft back to its "Big Three" core: the business division, Windows client division, and the server and tools division. One analyst estimates the total value of these three divisions at $260B, slightly more than Microsoft's current market valuation of $256B- which means shareholders are getting zero value for the Xbox and online-services division.

No one is suggesting that such a proposal is in the works, but in the wake of the failed deal with Yahoo (YHOO), investors might be waiting for just this kind of forward-looking move from Microsoft's management.

Comments

[truthinvesting:]

Stock is underpriced and for those of us like myself you have played the range we have done fine. On my freewebsite bargain bins you will see 3 profitable trades in the past 3 or 4 months

2008 Aug 10 02:51 PM

[Dan Jacome:]

excellent idea; kudos to whoever this ex Goldman alum is and was wise enough to do a sum of parts on Softee.

2008 Aug 10 04:31 PM

[marketwatchr:]

Good observation...but there is still a boat load of cash to do something with. Divided rather than a buyback ?

2008 Aug 10 04:42 PM

[Alex Filonov:]

MSFT can't unload online division, the only way to get rid of it is to shut it down. Who needs a business losing 2 billions a year? Xbox might be worth something as a spin-off, but competing against Sony and Nintendo without MSFT deep pockets might be scary. Break up looks good on paper, but in reality... I don't know.

2008 Aug 11 12:04 AM

[samij:]

XBox and online services don't contribute into MSFT stock value because they are money losing operations, simple as that. How would you spin-off these? Selling them? Who would buy them? Separating them as independent companies and giving the stock to MSFT stock owners? In order for them to survive one day as independent companies, they'd need cash injection from MSFT -> +- 0 gain for MSFT stock owners.

I agree, MSFT would do best by shutting down them, but that seems unlikely under the current management, as they have too much pride invested in these operations.

Not to mention that spinning them off would signal complete failure on MSFT part to find any real growth opportunities outside it's old core businesses. Would that really be signal encouraging to buy this stock?

2008 Aug 11 04:48 AM

[Richard Col...:]

Microsoft is like the old AT&T of yesteryear. You buy them for safety and the dividend which is about 1.60%(not bad for these times of low interest rates) There P/E isn't dad either at 15%. A company this size will always have some losers. I'll sign my name.
Daniel Kowkabany

2008 Aug 11 10:57 AM

[mollytjm:]

the xbox is the only part of the company that seems to be forward looking and not late at the gate, as they were with the Zune. they rested on their laurels and the perceived power (and near monopoly) of their position in the marketplace for way too long. they may be able to reinvent themselves, but they better do it fast... i'm not optimistic about THAT... they puttered around with Vista for years and it's a disaster. they'll be ok for awhile since so many companies use their products, but unless they wake up and get innovative, this won't be a good long term investment.

2008 Aug 11 11:26 AM

[msftxno:]

Xbox is a money loser. The box is sold at a huge loss, and reliability is so bad MS has replaced some customers boxes 3 or 4 times. Game sales still haven't caught up with the razor/razor blades model they are using.

The online division has and will always lose vast amounts of cash.

Zune has been massively costly.

The office productivity software is profitable but will see massive erosion now that there are other viable options. Many but customers have moved on.

The OS business is the only thing that makes, or rather, prints money. The huge revenue and high margins are the classic software product. It is not a great OS but it's base is huge and has a very long tale, the shift to another platform (like Apple) will take a decade or more.

MS would do well to unload all these losers so they can focus on straightening out the Vista mess, because OS and Office sales are the only thing they make real money on.

Buying Yahoo would be the worst thing for both companies, though Yahoo stock would benefit,

2008 Aug 11 01:41 PM

[george.haney:]

Microsoft will never break up.. it is being lead by a titan who is acting like a titan... Ballmer couldn't even tame Yahoo (which would have been easy.. buy them? Destroy them then buy for nothing DUH!)...

I think that before anything better comes from MSFT, the regeime in place needs changed... and the management structure needs to be eraticated.. my friends who work there do nothing but complain about the layers and layers...

Wake up MS... be the inovator you USE TO BE... we miss Bill..

George E. Haney III, PMP, MCP

2008 Aug 11 01:57 PM

[jack dee:]

Fun idea, but breaking Xbox away from MSFT shows the OP has little knowledge on subject.
XBox has real value to MSFT, it is a war for shelf space, a war for hearts, minds, dollars, time, cables, formats, developers, standards and more.
To win these interwoven battles the contestants (msft etc) must at least show up.
MSFT would be foolish to retreat to a redoubt, MSFT is not some Car company trying to sell swimming pools. Software both online and off is blending with multimedia and tech in ways we are not even sure of yet, to reduce your points of contact is to reduce your chances of winning, or for that matter even making it to the next round.

Perhaps JNJ should sell off its RnD , I mean when the last time RnD ever made a profit! oops I forgot without the research and the money pumped into ideas that never make a penny, JNJ would just sell band aids.

2008 Aug 11 02:46 PM

[Tom B:]

Xbox is a money LOSER. It only LOOKS profitable because of the "bubble" on one, single profitable year. And, with Bungie having "left the building", the franchise will be slowly disembowled by nimbler competitors (Ninendo).

2008 Aug 11 05:14 PM

[kurt walter:]

MSFT please keep XBOX ... and please forget Yahoo. ...

2008 Aug 11 08:42 PM