Wednesday, May 11, 2011

The Reason MSFT is an unloved business: Management

So, in some earlier posts I explained why I like MSFT - the company continues to earn near monopoly profits in its core segments, which, despite all of the hype to the contrary, are not going away any time soon.

Actually, my favorite comparison is IBM, which has continued to make money in mainframes even as "everyone" was switching to distributed computing.

Unfortunately, MSFT is not happy to mint money with its signature franchises.  It is looking to grow, like most companies, and is determined to be a player in mobile communications and mobile computing, as well as online services.  This is not a bad idea, necessarily, though, one has to concede, it is not as good a business as the ones it already has.  Still, it is a viable use for some of the company's cash, which it spews in copious amounts.

The problem is, management doesn't seem to have a clear plan for all of the acquisitions it is making.  Worse, it doesn't seem terribly concerned about the valuation at which it is buying companies.  Skype is clearly not worth $8.5bn.  I mean, this was a company MSFT could have had for a third of its current valuation just 18 months ago.  My own view is that MSFT management, paranoid about competition from Facebook and Google, is rushing to purchase firms that appear to be interesting to either of the other two.  Not, therefore, because of the strategic value to MSFT, but just as a blocking manoeuvre.

Such unstrategic, reactive, decisions mean that MSFT is focusing on outbidding competitors for assets, usually a good way to ruin a good business by overpaying for shit you don't want.  Moreover, it is hard to see why MSFT should worry much about Google acquiring things: most of GOOG acquisitions have been disasterous.  Despite billions on assets like youtube, GOOG has only ever made money at one thing: search.

I say to MSFT, let Google overpay for assets.  Focus on a core strategy and invest in your core business.  Or return the cash to shareholders to invest in better businesses elsewhere.

Incidentally, Jim Cramer had an interesting idea for MSFT - that they could have built Skype's functionality into MSN Messenger for less than they paid, and could have instead purchased a company with real revenues and good subscription revenues - i.e. buy Netflix.


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