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.