Malstrom linked this Barron's article on his site, and though I think it will never happen, it is an interesting article written from a Microsoft inverstor's view.....
http://blairwestlake.com/community/blogs/articles/archive/2008/08/09/4167.aspx
BARRON’S
Tech Trader/TECHNOLOGY WEEK
Why Microsoft Should Spin Off the Xbox
By Mark Veverka
11 August 2008
As the songwriter Neil Sedaka famously crooned, "Breaking Up Is Hard To Do."
This is especially true if you're talking about breaking up Microsoft (ticker MSFT). Not that anyone is suggesting that such a proposal is in the works, but at least one unhappy investor has bothered to give it some serious thought.
A savvy contributor to voiceoftheshareholder.com, a Website where investors can anonymously share their analyses with other investors, recently posted abreak-up analysis of Microsoft aimed at explaining why shareholders aren't thrilled with the current state of affairs.
"This is not a typical activist investment idea. No one is going to get board seats on Microsoft's board," the analyst writes. "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."
The author, whom I contacted via e-mail, once worked for Goldman Sachs, then for a good-sized hedge fund, and now manages money on his own. His analysis, which strikes me as an honest and well-executed intellectual exercise, concludes that Microsoft's entertainment and device business, primarily Xbox, is undervalued by the recent stock price of about $28. He proposes that the division, which accounted for 13% of fiscal year 2008 revenues and 5% operating margins, be spun off to unlock its true value.
He also suggests that the money-losing online-services division, which would benefit most from a Yahoo! (YHOO) deal, also be spun off. This move, he argues, would discourage the company from overinvesting in the business at the cost of other core business divisions, which in turn would give investors more confidence that the quest for online services doesn't become a black hole. Online services, which includes Live Search and the MSN portals, accounted for just 5% of annual revenues and minus-38% operating margins.
That would leave what the contributor calls the Big Three: the business division, Windows client division and the server and tools division.
The Microsoft business division consists of the Microsoft Office system and Microsoft Dynamics business solutions. It accounts for 31% of revenues and provides 65% operating margins. The Windows client division, which includes premium edition and standard Windows operating systems, racks up about 28% of annual revenues and boasts 77% operating margins.
Those two "are arguably two of the best businesses in the world," the author argues. "They have a monopoly position, [although] they are facing upstart challenges from Apple [AAPL] and Google [GOOG], respectively." He estimates the two units together are worth about $250 billion.
The server and tools division, which consists of server software licenses for Windows Server, Microsoft SQL Server and other server products, generates 22% of total revenues and produces 35% operating margins. He pegs the value of the unit at $55 billion.
Thus, he values the Big Three at $305 billion. Plus, the company has about $35 billion in cash, which raises the total value to $340 billion. Last, the author subtracts $79 billion for "other and corporate overhead," which brings the total value of the Big Three, without entertainment devices and online services, to about $260 billion.
That is slightly more than Microsoft's current market valuation of $256 billion, which means shareholders are getting zero value for the entertainment and device outfit, the author contends.
What to do? Spin off the Xbox division, which was largely a defensive effort on Microsoft's part to thwart the threat of a home-entertainment appliance overtaking the personal computer as the "operating system" of the home. "This threat has been diminished in recent years (see the flop of AppleTV)," the author writes. "They are fighting a ghost of the past with this division, and it is time to let it go." He estimates that the unit might fetch $4 billion in the open market. In comparison, Nintendo is worth roughly $7.5 billion, he adds.
Spinning off the online division "would clearly signal to the market that there is a limit to Microsoft's willingness to invest in the online business without seeing profits," the author says. "Such a company would be free to strategically attack the online advertising market as it sees fit and complete mergers with its own currency," or even become an attractive takeover target.
The new entity, he adds, would be emancipated from the legacy culture, and appropriate incentives could be implemented to ensure that future leaders go about creating a profitable enterprise.
Of course, all this may never happen. But it gives Microsoft bulls a clearer look of what they are up against in the wake of the Yahoo! takeover misfire.
Kudos to the board of directors at Motorola (MOT), the gang that couldn't shoot straight. It appears that they finally made a smart decision.
Last week's announcement to hire Qualcomm (QCOM) Chief Operating Officer Sanjay Jha indicates that they may have finally found the right person to right the company's beleaguered handset division. Nearly everyone in the wireless industry views Jha as a strong choice, but the turnaround will be difficult and lengthy.
And at what cost? The board had little choice but to pony up roughly $94 million, according to The Wall Street Journal, to get their man. Jha's package also includes a $30 million payout if the company fails to spin off the handset division by Oct. 31, 2010. In Plugged In columns, I have argued that the parent company would increase the chances of turning around the handset division if it were to keep the unit.
The board now has a $30 million incentive to push for completion of the spinoff, whether wise or not. Yet another example of how that group tends to operate from behind the eight ball. Charter Equity Research analyst Ed Snyder doesn't think the payout clause means the spinoff is assured. "To the contrary, he gets paid if it happens or not," he says.
Losses have to narrow to have any reasonable hope of capitalizing the business, and that can't happen until Motorola fields an entirely new, and successful, handset line up, he adds. "You can throw millions of engineers at this problem, and it won't move any faster," Snyder says.
Two years can fly by when you're trying to fix a broken cellphone outfit.
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