Tuesday, November 16, 2010

Breaking up Microsoft?

At today's shareholders' meeting for Microsoft, Steve Ballmer responded to a question about whether Microsoft should be broken up. The question did not just out of the blue. In fact, Goldman Sachs asked a similar question recently. Ballmer argued that the whole is worth more than the sum of the parts. He and Gates explained that value would actually be destroyed by trying to pull things apart that were closely linked together. In short, they argued that diseconomies of scope would result.

I think the "whole vs. sum of parts" issue is very interesting for a firm such as Microsoft. The company is not a conglomerate with distinct business units that have few scope economies. Clearly, synergies do exist, and the businesses do have strong linkages. That doesn't mean that the firm should be kept together, but it does mean that one has to be careful when analyzing the "sum of the parts." Determining the value of a part in a related diversifier can be very, very difficult. I would be cautious about any banking analyst's calculations, and I would want to really understand the extent to which a break-up would disrupt scope economies.

1 comment:

Jagadeesh Venugopal said...

Are we mistaking cause for effect? Is the breaking up of Microsoft infeasible because of the tight integration among its products, or is this tight integration a product of Microsoft's monolithic structure?

I would argue that Microsoft's enterprise business has little to do with its Phone, XBox, Zune, etc. businesses. Similarly one can make the case that its server based products (SQL Server, et. al.) are distinct from its client based products (Windows, Office) and can be separated.

Over the last decade or so, the only one truly innovative product Microsoft has delivered is the Kinect gaming device add-on. Virtually every other product in every other business area is a me-too imitation or something that was bought out by Microsoft.