Should Microsoft Be Carved Up?

A recent Goldman Sachs report that downgraded Microsoft stock from Buy to Neutral also made this startling suggestion: Microsoft should be carved up, with its consumer division severed from its enterprise business.

Goldman Sachs reasoned that the consumer division has value that could be unlocked if the unit was spun off. The combined stock valuation of a new consumer company plus the enterprise-focused Microsoft would exceed the valuation of Microsoft in its present form, said Goldman Sachs. (This differs from the plan to split the company in two that was raised in the antitrust suit in 2000: It called for one division focused on operating systems and another focused on applications.)

The way Goldman Sachs figures it, when you value Microsoft's various divisions individually, the combined figure is $259 billion, about $52 billion more than Microsoft's current worth.

It certainly sounds like a good deal for stockholders -- who wants to turn down a $52 billion profit? But would it be good for Microsoft in the long term? Or for users of Microsoft products? The answer on both counts is no.

Wall Street focuses on short-term profits rather than the long-range financial health of a company. That's to be expected. Stockholders only have a stake in a company when they're holding stock, not after they sell it. If the company heads south after they sell their stakes, so be it.

But employees of a business, and the people and companies that use that business's products and services, have a very big stake in the long-range health of a business, no matter the current stock price. Stock prices will always fluctuate; running a business based on short-term profits is dangerous.

So, what would splitting up Microsoft mean? It would make it far more difficult for the company to innovate, and far less likely that customers would get the best products and services possible.

The key reason is that the line between consumer and enterprise products is thin and getting thinner all the time. Smartphones, for example, started out as enterprise tools, morphed as consumer tech, then re-entered the enterprise in new forms. Other technologies developed for consumers may one day find a home in the enterprise.

In addition, research can be shared between consumer and enterprise divisions. Even when there's no clear, direct link between consumer and enterprise products, Microsoft can take what it learns from one product line and apply it to another. Take the cloud, for example. There's no doubt that cloud computing is important to Microsoft's future. The better Microsoft understands the cloud, the better its products will be, and as a result, the better off enterprises will be.

Where does Microsoft have long and deep experience in cloud computing? In its Xbox Live online gaming service, which the Goldman Sachs report described as "one of the largest paid cloud communities in existence." By learning how to manage a high volume of cloud-based transactions there, Microsoft has built up very important expertise in cloud-based computing. It can take that knowledge and apply it to enterprise computing as well. If the company were split, it wouldn't be able to do that. The company, and those who use its products, would be far worse off.

The upshot? If Microsoft were chasing easy, short-term profits, it would make sense to spin off its consumer division and get a hefty sum in return. But if it's looking for long-term health, it makes sense to keep the company whole. And all indications show that's exactly what it will do.

Preston Gralla is a contributing editor for and the author of more than 35 books, including How the Internet Works (Que, 2006).

Copyright © 2010 IDG Communications, Inc.

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