There's barely room for two dedicated handhelds, let alone three.
Especially in the west. The PSP survived as long as it did because of the tremendous support it received from Japan. Any Microsoft portable wouldn't have any presence in Japan, and Microsoft wouldn't be able to convince any major western third parties to take the device seriously.
They'd have a tiny market to cater to, and little of note to offer that market, yet they'd be spending billions on developing, manufacturing, marketing, and selling the device. It'd be a bloodbath for the Xbox division.
Plus, they seem to be pursuing the handheld gaming market through WP7 and Windows 8 already, an approach that will likely be far more lucrative and far less costly than any potential alternatives.
