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Split-Up Microsoft Would Be Valuable

November 10, 1999

NEW YORK (AP) _ With a market value of $450 billion, Microsoft is already worth more than any company on Wall Street. Lost somewhere in the shadows of that mighty valuation is another $50 billion worth of Internet businesses.

The analysts say forget about it: Even though Microsoft now bears the mark of ``monopoly,″ it’s way too soon and most unlikely that the software maker will be divided into smaller companies. And yet even they find it hard not to wonder whether Microsoft is actually worth less than the sum of its parts.

After all, the government-ordered breakups of the AT&T and Standard Oil monopolies both paid off nicely for shareholders. Their offspring, giants like Exxon and Bell Atlantic, eventually proved to be more valuable as independent companies, maneuvering with greater ease than their bloated parents.

Microsoft would seem to fit the same description, especially with a big stable of Internet businesses and investments that would be worth far more on Wall Street if not hidden in the shadow of such a huge company.

But even those inclined to speculate on an eventual Microsoft breakup in the government’s antitrust case would be well advised to wait, analysts cautioned.

For one thing, especially if history is your guide, it may be too soon to act.

While most any investor would be pleased today with the combined stock gains of Ma Bell and all its eventual children, there was an extended period leading up to the 1984 breakup where AT&T’s shares struggled, said Gail Dudack, chief equity strategist for Warburg Dillon Read.

AT&T rose just 4.7 percent from January 1982, when AT&T’s antitrust suit was settled, to February 1984, when the Baby Bell local phone monopolies began trading as separate stocks, Dudack said Tuesday. By contrast, the Standard & Poor’s 500-stock index rose 34.6 percent over that span.

The problem, which Microsoft seems sure to encounter, was a nagging doubt about whether AT&T’s case would drag on for years.

Already, Microsoft has been hit with a damage suit hinged to late Friday’s ruling by a federal judge that the software maker exploited the dominance of its Windows operating system to control the computer industry.

``The period of uncertainty is the difficult period in antitrust suits. The good times begin after settlement,″ said Dudack, noting that Microsoft was already lagging its rivals and the overall market in 1999 before last week’s ruling.

Quite possibly, she added, better bargains on Microsoft stock may arise on the way to a final resolution, whether its a settlement with the government or a penalty other than a breakup.

Still, most analysts say a breakup of Microsoft into smaller companies would ultimately be a good bet for investors.

The software maker could be divided into four companies: one that makes operating systems like Windows; another that makes software applications like Microsoft Word and Excel; one operating Web businesses such as the Internet Explorer Web browser and the MSN online service; and a holding company for the companies investments in a wide array of Internet-related businesses.

Like most popular Internet companies, Microsoft’s Web-related ventures lose money, weighing down the software maker’s bottom line and its market value.

But spun off as a separate company like CMGI _ the savvy firm with stakes in AltaVista, Lycos and nearly 50 other Web companies _ Microsoft’s money-losing ventures would be worth anywhere from $50 million to $100 million, said PaineWebber analyst Don Young.

Thanks to their unbounded potential, Internet ``pure plays get a much higher market valuation than Microsoft does,″ said Andrew Roskill, the analyst who follows Microsoft at Warburg Dillon Read. Microsoft, he said, is valued ``relative to it slower growth prospects, like other large-cap gorilla tech stocks.″

But on the downside, the creation of one or more Windows-specific businesses may not be so appealing, especially if they are restricted by new government regulations or compete directly with one another.

``It’s likely that the growth rate of that business might not be as fast as before and would be assigned a lower value,″ said Roskill.

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