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Tickers in this Article: MSFT, GOOG, YHOO
Microsoft (MSFT) continues to frustrate. The stock has barely budged since 2002. Even worse, the stock dropped 11% after management slashed forecast earnings on the back of plans to spend $2.5 billion more than expected on new technologies, marketing its Xbox games, and fighting for online supremacy against Google (GOOG) and Yahoo! (YHOO). The stock decline wiped out some $30 billion in shareholder value.

In a bid to build share value, Gates & Co. plans to plough huge sums of money into "webifying" Microsoft, knitting together all its software products and services on an Internet server platform. But call me crazy, here's a different idea: instead of spending to tighten-up the group's various bits and pieces, the software titan would better serve shareholders by splitting them apart.

Consider Microsoft split into three chunks. The first part would concentrate on operating systems. Of course, this would continue as a quasi-monopoly, pumping out plenty of cash, with expected sales this year of about $25 billion and operating profits of about $12 billion. Valued like a regulated monopoly utility, with an operating profit multiple of say 14, this group would be worth $168 billion dollars.

The second group would produce Microsoft's Office software products. This too, would be another cash cow, with about $12 billion in sales and operating profits of about $6.5 billion. Valued on the same utility multiple, this group would be worth $91 billion.

De-coupling the Office software from Windows software would get anti-trust authorities off Microsoft's back. At the same time, the cash that these two businesses generate, rather than subsidizing less profitable parts of the Microsoft Empire, could be doled out to shareholders through bigger dividends and share buybacks.

Finally, a third group would hold Microsoft's new-fangled technology businesses, including the Xbox games and MSN Internet portal. While this group has yet to show signs of profitability, it is expected to deliver more than $7.5 billion in revenues. By contrast, Wall Street analysts have Google's 2006 revenues pegged at $7.0 billion.


Of course, the new technology group wouldn't get Google's 18 times sales multiple, or even Yahoo!'s multiple of 12. But even valued at just 6 times sales, the business would be worth nearly $46 billion. Besides, cutting loose these businesses could re-kindle the kind of creative energy needed to spark growth and get the market interested in Microsoft again.

Selling or spinning-off pieces of the Microsoft empire wouldn't be an easy task -- but it sure looks like it might be worth the effort. The total value of Microsoft's separate parts, plus its $38 billion cash pile, amounts to $303 billion in market value -- or more than 21% higher than the stock's value today. At the very least, that would start to ease investors' frustrations.

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