Wednesday, November 17, 2010

Microsoft's Refusal To Consider Splitting Itself Into Separate Units

Imagine my surprise in finding yesterday's Wall Street Journal's Marketplace section's lead headline to be Microsoft Breakup Not in Cards.

Back in August of 2007, I wrote this post, in which I explicitly suggested,

"As I wrote nearly two years ago, what Microsoft needs to do is think and behave like a venture capitalist, and spin out various smaller entities to work on the areas in which it wishes to lead. By retaining a stake in the firms, seats on their boards, Microsoft, the parent, will share in the innovation-based value that these startups will create. In time, these startups could become the next Googles, etc.

But so long as senior Microsoft executives respond to Mundie's efforts with comments like Tom Gibbons, VP for various non-computer software efforts,

"I need to think of this as a completely new effort,"

in response to Mundie's stimuli involving mulicore processors, I think Microsoft is doomed to remain a large, hulking, mediocre giant whose best days of consistently superior total return performance are way, way behind it."

Another posts discussing this may be found here. Suffice to say, others have publicly echoed my thoughts in the last few years.

For Ballmer and Gates to audaciously dismiss shareholder questions about this is really over the top, isn't it?

Last time I looked, neither of those two Microsoft board members and billionaires are valuation experts. Gates didn't even finish college.

That's not to take anything away from how Gates originally built Microsoft. I wouldn't go so far as Julian Robertson did, calling Gates the most important innovator or inventor, or whatever he called him, of last or this century. But I do acknowledge his early success in providing consumers with powerful, inexpensive, fairly useful, if not elegant and bulletproof applications and operating system software.

Ballmer's only stock in trade, of which I am aware, was bullying customers like Dell and HP to pre-load Windows and, at one point, Explorer, on PCs, or else.

Neither earned his spurs as either an investment banker or valuation consultant. So wouldn't it have been a reasonable, even defensible response to the investor's question for Ballmer to agree to have the board consider retaining one or two outside, objective experts to opine on the answer to his question? The Journal article even references a Goldman analyst's public suggestion that spinning off the businesses "could potentially unlock hidden value."

Sure it would. But the wrong way to answer was what Ballmer and Gates did, which was to simply dismiss the question out of hand, citing their own personal beliefs in a preference for a monolithic Microsoft.
I don't care what Gates or Ballmer babble about imagined "synergies." Ballmer's public acknowledgement of the company's dismal share price performance over the past decade, combined with a refusal to think broadly about how to remedy that failing, tells you all you need to know about the firm's closed-minded management.
A few weeks ago, I heard one of those inane pro-con CNBC debates on the occasion of Gates' birthday. In that post, I wrote,
"In the CNBC discussion, two fund managers with opposing views were pitted against one another on the occasion of Bill Gates' birthday.

What amazed me is that, despite the admission of a decade of non-performance, the CNBC anchors refrained from criticism of the company. Instead, they seemed to want to favor the opinions of a fund manager who claims that the firm's cashflow will now rise, and the XBox proves the company is still innovative.

I can't think of many companies with a flat ten-year equity price performance that roughly apes the S&P which would enjoy this sort of media treatment."

For some reason, Microsoft, and Gates, seem to provoke irrational responses by analysts, fund managers and the media. They get a pass for poor performance, where other firms would be flayed for the same failures.

It's probably another example of a corporate failure having too much influence and spending power to warrant being treated honestly in the media, fund management and brokerage communities. Heaven forbid one of them should lose their place at Microsoft's spending or information trough for being candid about the firm's lackluster performance and mistreatment of its non-billionaire or -millionaire outside shareholders.

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