Barron's made a interesting point!

Hello everyone,

While I spend much of my weekends wishing that the markets were open on weekends, I do spend a significant time (read: all my time) reviewing analysis of the markets by analysts. So, I was intrigued by an article in Barron's Online which proposes a Microsoft breakup as a means to achieve ultimate value.

Give me a second here...I need to think up a terse response to Barron's comments with a slight word play.....

You know, I don't know how Barron organizes itself internally, but I bet there is a research department.

I imagine they call it Barron Research.

That is ... BARE ON RESEARCH.

You know the article is a sure classic for the record books of analysis when it quotes an anonymous comment on an internet website in its opening. But aside from quoting random internet posts as the opening basis from proposing an idea, the Barron's article proceeds to discuss that by spinning off the internet division of Microsoft, which has a horrendous margin of nearly -40%, Microsoft can unlock value and let Microsoft's computer based businesses come back into focus.

Bare on research is right. In theory, Microsoft should just spin off its losing divisions and focus on the zero-growth, high piracy prone divisions. They should focus on pursing legal action aganist 14-18 year olds who don't want to pay $100 for Windows Vista, instead of winning them over with the $300 Xbox 360. Maybe, just maybe, they just only focus on the divisions which you can calculate exactly what the market is for their product and know that you'll get whatever cash flow no matter what you do. Forget the fact that you can't fabricate a Xbox 360 by yourself and free programs such as Firefox and Linux are adding pressure to the core divisions.

What "Bare On Research" may not realize is that business isn't about focusing on cash cows. A cash cow doesn't need focus. Microsoft has been making operating systems for a long time, and they do a pretty good job with it.

You don't focus on the cow, you just take the milk, sell it, and buy what you want with it. Microsoft wanted to buy a entertainment division which might become a cash cow later on. They wanted to buy a website called Yahoo which might become a cash cow in a while. They want to make some progress into cloud computing, so they are using the profits from the milk to drive that. My favorite site for analysis, Seeking Alpha, said that if Microsoft insitutes a buyback, such action is tantamount to admitting that they have run out of ideas.

Hold on, let me make sure I understand what I'm hearing - somehow, by reducing investment in the only parts of your business that have any meaningful growth prospects in the long term, you are securing your company's future? That doesn't admit that you're out of ideas? Did I hear that right?

Cows don't need much attention to produce good milk. They need to be fed and treated along the guidlines of PETA. A Microsoft buyback allows them to return value to shareholders while ensuring there is enough cash flow to fund new ventures to find new cash flows. Just because something isn't profitable now doesn't mean it won't be profitable in the future. Believe it or not, there was a time where Microsoft Windows wasn't profitable.

Businesses which are willing to take short term losses are called Microsoft and Berkshire Hathaway.

Barron's Research should look into that.


-Mansij Hans, E.I.T.
Member, Intigril Capital Management

Disclosure: Intigril Capital Management is long Microsoft at the time of publication of the "Barron's make an interesting point!" article.