Once again there have been discussions in the press about breaking up Microsoft. Years ago it was the government pressing the issue because of Microsoft’s perceived monopolistic hold on a number of software markets. Now it’s being driven by shareholders, unhappy with the stock’s unimpressive performance over the last decade. MS management is not fond of the idea of being broken apart, as management’s tend to feel. Unless the CEO is a financial engineer by background, the management team generally has no interest in breaking up their kingdom. But is a breakup the best way to go in the long run for the company? Will MS shareholders be best served by such a strategy? Let’s go to some of the pros and cons.
Pro Breakup Arguments
A breakup could unlock value not reflected in the MS share price–
The share price has been roughly flat over the last eight years. This is for a company that still dominates many computer markets, and is enormously profitable. Something isn’t right. Some would say that some parts of this huge company are over shadowed by the dominant businesses, and therefore aren’t fully valued. Specifically, you could break out some fast growing businesses that might demand a higher multiple. Conversely some slow-growing, but large businesses which generate large amounts of cash flow could become great dividend payers, like the GM or AT&T of their golden years.
There are also some potential advantages not so obvious to financial engineers:
Smaller, less bureaucratic operating units
This is not to be underestimated in its power to unlock value and growth. Anyone who has ever worked in a large company, and then gone to a startup, can testify to what freedom from the corporate bureaucracy can bring. Everything happens faster, and innovation is unleashed. Thoughtful risk-taking is allowed, and hopefully encouraged. If you haven’t seen it, it’s hard to understand the huge change that can take place in employee attitudes and behavior when working in a more entrepreneurial environment.
Focus is one of the keys to most successful businesses, but is hard to quantify. When you are very large and feel the need to continue to grow, it’s easy to lose your way. Senior management has only so much bandwidth, and can have expertise in only so many areas. Once this bandwidth is exceeded or new business activity drifts into areas outside of core expertise, mistakes start to happen. When a business becomes too large and diverse the management almost always becomes sloppy, and sloppy wastes money and reduces profitability.
If structured properly, folks usually feel greater ownership and work harder, knowing what they do might actually make a difference. Not to mention that they are more likely to be recognized and rewarded for their efforts which actually grow the business.
No Place to hide
This is true both for sub-par employees and poorly performing businesses. There are many places to hide in a bureaucracy. With large profits and so very many people, staff jobs abound without a clear need, and real jobs that need to be done are broken up into such small pieces that accountability for the bigger picture suffers. New business units can be run as money losers for years as pet projects of a senior executive. In a leaner, more focused organization, both these phenomenon tend to go away.
Con Breakup Arguments
Many would say that you’d give up a lot of great synergies in any breakup. The Office business was built in large part on the shoulders of the Operating System business, as an example. And Microsoft has stayed very focused on software (with a few high profile exceptions like the X-Box), so many of the businesses do relate to each other in relevant ways.
This may be the greatest argument, in my mind, against breaking up Microsoft. The power of the Microsoft brand is enormous; put the Microsoft name on any new software or computer-related product and, at a minimum, it becomes an immediate contender in it’s category. Many mediocre software products have become category leaders almost strictly due to the power of the Microsoft brand. In any breakup one of the companies would retain that brand, and the other progeny would certainly be large enough to establish strong brands quickly. But would it ever be the same?
To some folks, it just wouldn’t feel right. This is Microsoft, after all. The alpha dogs of software. One of the great pioneers and dominant companies of American high tech. To some, it would be unthinkable to destroy such an American icon, like tearing down the Statue of Liberty.
This all comes down to preferences and judgment in the end. Some like scale and dominant brands like today’s Microsoft, others prefer the speed and flexibility that comes with smaller business units. Many believe that there is nothing like a dominant industry player to drive profits, while those with a contrary view would say that visibility of individual businesses and less bureaucracy lead to greater returns. In my opinion, every major corporation runs its course as a successful entity, eventually faltering under its own weight as it suffers the excesses of success. The trick is in knowing when this point comes–and it’s often not obvious, except in hindsight.
My view is that Microsoft has likely reached a point where a break up makes sense. You could segment MS into several still very strong separate compaies, which I believe would free them to focus on specific markets with much less bureaucratic drag. That’s my view–what’s yours?