Buzz: Breaking Up Microsoft
The WSJ recently had an article discussing a notion that a number of value investors have been championing for some time now: breaking Microsoft up. Since each of the pieces seem to rely on each other (especially on the PC and mobile operating systems), this would be a very tricky proposition to pull off. Food for thought though...
Gates Should Weigh Microsoft Breakup
Divisions Would Aid Value,
Mere-Mortal Managers;
Good Timing for Bloomberg?
June 17, 2006; Page B14Bill Gates is gradually ending his day-to-day involvement with Microsoft and focusing on charity. Because the move offers a time to reflect, here is something Mr. Gates should ponder. His reputation as a software developer is assured. But wouldn't breaking up his creation be the best way to secure his legacy?
Sprawling companies are difficult to manage. Microsoft's businesses stretch from its ubiquitous Windows software to videogame consoles to an Internet portal. Moreover, the company seems to have lost its touch. It has fallen behind Google in Web searching, and its latest operating system is severely delayed. Microsoft may just be too big for Chief Executive Steve Ballmer, or indeed anyone, to handle. Mr. Gates's plans to step back may only intensify managerial problems.
The company has three distinct businesses. Its operating systems are growing slowly, but produce tons of cash. Its suite of Office software products is in a similar position. Meanwhile, Microsoft's other efforts are potentially fast growers, yet mostly burn cash. Separating the company into three businesses, or more, would make them easier for mere mortals to manage.
Moreover, divvying up the company could help to secure Mr. Gates's reputation as a great philanthropist. He already plans to give away nearly the entirety of his fortune. Breaking up Microsoft should mean he has more to give away. Value investors think Microsoft allocates the capital generated by its cash cows poorly. Growth investors think some of the company's efforts, like cellphone-software production, are smothered in such a large organization. Both sets are unhappy, so Microsoft trades at a measly 16 times next year's estimated earnings. A breakup could raise this multiple.
Of course, the company is still earning billions of dollars and has significantly improved operating results. But Mr. Gates was violently against governmental efforts to break up his company in 2001. He may be less defensive if he comes to the decision himself, especially once he removes himself from the daily grind and potentially gains some objectivity.
And there's one last appealing point: No one would expect Mr. Gates to be involved in every offshoot company to the same degree. He can concentrate his efforts on the parts of the business he likes best. And who knows, it may even bring out some youthful fire.