Activist Shareholders May Force Microsoft to Sell Xbox & Bing

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Xbox Bing

Wall Street’s top-ranked software industry analyst for nearly two decades, Rick Sherlund, the former Goldman Sachs now Nomura Equity research analyst has covered Microsoft since they went public in 1986.  Sherlund is a personal friend of Bill Gates & Paul Allen and was a liaison between Goldman & Microsoft during his time there. In a report he published today he recommends Microsoft sell Xbox and Bing:

Sherlund of Bing:

While we like Bing as a service, we need to look at this from an ROI and strategic perspective. If Microsoft could sell or even give Bing to Facebook or Yahoo and eliminate its operating costs and get a Traffic Acquisition Cost (TAC) back to monetize the traffic that Windows/Internet Explorer or Xbox in the living room can drive to Bing, this might generate perhaps $1.0bn of profit and positive FCF rather than be a drag of a similar magnitude. If this were returned to shareholders, this could add nearly 1% incremental to the dividend yield, in our estimation.

Sherlund of Xbox:

Xbox is one of the areas of success for Microsoft and is cool to consumers, but it is perhaps time to assess whether this can ever be material to the overall company and might be more leveragable to a consumer-oriented company such as SamsungPerhaps they would be willing to pay several billion dollars for this to leverage their substantial consumer electronics business? Shareholders might want to know if they could possibly be better off if Xbox were spun out as a separate company or sold. Either way, it is not that material to the overall valuation of Microsoft and will not likely determine the success of Microsoft going forward; it’s just not profitable enough to move the needle that much at the company.

So with Bing sold to Yahoo or Facebook and Xbox sold to Samsung, that leaves Microsoft primarily with Windows & Office.  Sherlund isn’t happy about Office either:

Sherlund writes, “We believe there are many iPad and Android tablet users that would be willing to pay a monthly subscription fee for Office were it delivered on these platforms. Since Office is not available, users are finding substitutes such as Evernote, DropBox, Pages or Google Docs etc. This is bad – Office is being disenfranchised on the hottest growth platforms.”

Now we’re getting to the real reason why Sherlund has put forth these crazy ideas. ValueAct Capital recently disclosed that it has acquired about 1% of Microsoft’s shares and spent a couple billion doing so.  Sherlund believes activist shareholders may force Microsoft to do not what is in the best interest of the company, but what will return the most money to the shareholders.  One way of doing this will be to divide the company up, while it is at maximum value, and sell it off piece by piece.  Paul Thurrott has in fact recommended this for years.  Sherlund believes one way Microsoft could do is by selling of Xbox and Bing, which he believes are not core to the company and will not significantly move the stock price up.

I personally believe that selling of Bing and Xbox is the stupidest thing Microsoft could do, and it will not happen.  But the threat of shareholder activism is always real and it will be interesting to watch in the coming months.

About Author

Suril is a scientist, journalist and obsessive Microsoft observer. He holds an advanced degree in Biotechnology with minors in Biochemistry, Microbiology, and Molecular Biology. Send him tips on twitter: http://www.twitter.com/surilamin

  • http://www.facebook.com/hingethunder Mark Matheson

    Too much money really isn’t enough for some people…

  • Georgezak

    Sell Xbox to Samsung? The analyst must have smoked some weed to write something like this.

    • Cormang

      no man, weed doesn’t make you this oblivious. he’s on crack.

    • discutter

      He’s right on the money. Well on HIS money. They don’t care about anything but dividends and share prices

  • http://www.favbrowser.com FavBrowser.com

    Can’t wait for Xbox Galaxy S5

    • http://www.about.me/AngeloGopaul Eingoluq

      With Android bake and shake.

  • http://www.facebook.com/leandroilhabela Leandro Grião Barbosa

    jerk!

  • http://www.facebook.com/leandroilhabela Leandro Grião Barbosa

    yes, sell it and die sometime later on the beach.

  • this guy is an idiot

    This guy is a joke!
    If Microsoft gives Office to every tablet, there is almost no reason to buy Windows RT when compared to an iPad. I love Microsoft but I can’t see myself buying a Windows RT Device. If they just throw office away to everybody, nobody would get a Windows RT over an iPad or Android (despite I don’t know why people get Android Tablets anyway).
    Office is also what makes Windows Phone the number one for business phones.
    XBox is the cool side of Microsoft and also helps to drive Windows 8/RT and Windows Phone sales. You can be arguing with almost any Microsoft Hater saying Microsoft is for loosers (like the PC Guy in Apple’s advertisements) and never did anything cool, just need to say “Xbox” and he will admit he was wrong!
    Sherlund is probably the biggest jackass ever worked in Microsoft. If they sell Bing and Xbox he will automatically sell his share to get a huge profit before the hole company collapses…

    • http://profiles.google.com/wdmsagefire Robert Potter

      It’s a catch-22. Office is a big value for MS’s mobile platform, but it isn’t enough to capture the market and MS is still a distant third place. The longer iOS and Android are without them, and the more popular they become, the more comfortable people will be with alternatives. And once they’ve been weaned off Office, they won’t turn back.

      • PoohGQ

        I didn’t know the value of Office until I started to notice that a lot employees were lacking Office skills. I went on to suggest I train a few of them after work. Now I charge many for hourly classes after work. Most are now able to utilize Office Web Apps and see a lot of value in it to wonder why a version is not available for Android and iPad.. Well, what do you think my suggestion is…?

      • http://www.martinspierings.nl Martin Spierings

        But they are already working on Android an iOS versions arent they? At least that is what i though i’ve read here a few weeks ago? And even if it is released, Windows RT should get a bit more stuff to boost the platform. That is if that guy wants to keep Surface. But if you wanna drop RT, then why stop there and not drop Windows 8, Xbox, Windows Phone and more?
        At this time it might be profitible for shareholders, but i doubt it is for the future. They’ve already spent a heck of a lot to create and launch the Xbox One that it isn’t very smart to sell it because you don’t believe in it anymore.

      • Agosto Nuñez

        Not true, people use other apps like Apache’s OpenOffice for Windows and countless of other alternatives (I’m not counting Scroogle Docs on Scroogle Drive), but because Microsoft Office is the de facto standard, they still want it at home and wherever they are.

        I know a man with a large company that uses Apache’s OpenOffice at home, but will switch to Microsoft Office the moment something ”serious” pops up.

  • Adam

    WTF? Is this a joke? To Samsung? Good lord, if that were to ever happen, we would get gimmicky features and a cheap thin plastic box.

  • NegLewis

    He’s more than just an iDiot
    … He’s one with a history and a story to tell us.
    So… MS should sell it’s future for just 1%…
    WTH its wrong with you man?

  • Cormang

    I think he’s clueless. Does he understand how Microsoft is generating revenue? Does he understand Microsoft has finally made the drastic changes required to keep up in the consumer-driven marketplace that was once dominated by the enterprise? Does he understand how Google is profitable? If he does, then what the hell is he talking about?

    Xbox and Bing are the products and services which provide people access to Microsoft’s cloud services and advertisers. Spinning that off or selling it would limiting. We all know the enterprise/consumer split is fading away quickly. So why would anyone in their
    right mind segregate them even more?

    Sherlund’s comments were to simply drive discussion. Pretty lame.

  • http://twitter.com/Da_PHAT_Ninja Michael Lococo

    Xbox has just started to scratch the surface of it’s potential in the living room. Bing is an
    essential part of their growth in the living room. This could be the culmination of Microsoft’s 20 year pursuit of the perfect set top box.

  • jaylyric

    How about someone sell this fucktard a brain for his stupid ass suggestions?

  • CXM

    FROM THE FIREY PITS OF HELL WTF IS this idiot talking about? First off it is MYOPIC. This is laughable at best and totally against the core functionality of what the long strategy of Microsft is about. The long and argeous painful game of percerivience and patience. When Xbox One comes out this fall it will mark the point where the Windows 8 operating system will be on an actual consel and apps will come through to bring additional billions in profit to the Micrsoft ecosystem and shareholders. In others words – This guy is on CRACK

  • Mikado_Wu

    Sell Xbox? These people a idiots. MS is changing the Xbox to a Home Everything System. That is the direction of technology. These money people have NO idea what they are talking about.

  • Joe_HTH

    “Sherlund believes activist shareholders may force Microsoft to do not
    what is in the best interest of the company, but what will return the
    most money to the shareholders.”

    Shareholder’s can’t force Microsoft to do shit. They can take their money elsewhere, but they’ve never been able to force a thing. The board could fire Ballmer under intense pressure from shareholders, but that’s about it.

    I could see selling Bing, as it’s a money sink. However, Xbox is extremely successful and profitable, and selling it would be stupid.

    • grs_dev

      Bing is a defensive weapon. You don’t go selling the patriot missile just because it costs you money! Yeah playing defense costs money. Sherlund is not recommending any of this. He’s simply giving Gates and gang a heads up…

    • Loghorn

      “However, Xbox is extremely successful and profitable, and selling it would be stupid.”

      LOL, no, it isn’t. While they’re now making money off of Xbox 360, the Xbox brand is still in the hole, & has been for now 12 years.

      Proof:

      http://www.gonintendo.com/content/uploads/images/2012_3/ZUJHD.png

  • jo bee

    stupid speculators

  • kalval

    This guy is a short sighted moron. I can understand the advantages of offloading Bing, but can Microsoft afford to not have any levrage in the search and advertising market?

    Selling Xbox thhough is the worst decision possible for Microsoft right now. For one they are starting to integrate it with windows. Secondly it was recently revealed that its their strategy for a home operating system, an idea that, if pulled off, could give them a huge market to sell apps and other accessories to. Then there’s Samsung, who are not the type to enjoy paying for an OS when they can build one themselves. And there is Xbox video and music, which is in a way tied to the success of windows 8 as a tablet OS.
    This move is obviously designed to make this guy a quick $ given his recent investment in Microsoft, and not to ensure the long term stability and profitabilty of Microsoft. Putting all the eggs in the windows basket is a silly idea and will end up losing money and costing jobs. All after this man has made his profitof course. This is exactly the problem with greedy wall streeters getting a say in the direction of the company.

  • freeiam

    This is the end of Micro$oft

  • Myclevername

    Data is king and Bing and Xbox are the two rivers that deliver consumer data to Microsoft. There isn’t much Google can’t do as well as Microsoft these days. The Microsoft cash cow Office is in real danger of being replaced by cheap “free” Google clones. Hemdroid has taken over mobile and tablets. Consumers think Google is God because they make everything “free” and “open”. And all the while we just keep letting Google know everything about us so they can sell it to advertisers and make more “free” things that will then spy on us and each other even more (Google Glass). I really hope he is in the greedy stupid minority. Without Bing and Xbox Microsoft has no way to hold off Google and their cult of fanbois.

    • Agosto Nuñez

      Well, Google’s free services lack Microsoft’s quality and are ALWAYS the possibility of being subject to Google’s spring cleaning (deleting their cloud apps and removing ALL YOUR CONTENT), people will pass on Google, their entire existance is based on gathering personal data for 3rd party advertising.

      Reckon not to get Scroogled.

  • Seath

    Good God! What the hell is wrong with that guy! He should be taken out on short leash and whipped for his stupidity.

  • jvs

    Another iTard! I can see stupid people… and they are everywhere!

  • PoohGQ

    So. Surmise to say; this guy is from the 80s Microsoft try to dictate what he thinks is good for Microsoft now!!! If this analyst was to analyze Google, he would see a very similar organization there. Why does he think he knows where tech is going and what would actually benefit shareholders if they voted to break it apart. Microsoft shares are up more than 18% in the last 31 days. Can they all just STFU and allow Balmer to continue the new direction he’s steering this giant Titanic that is Microsoft, FFS???!!!!

  • donzebe

    This guy belong to a psych hospital.

  • grs_dev

    This is a good analysis. It says at a minimum, that these investments Xbox and Bing are now worth something :)

    2 years ago no one would have suggested that Microsoft could (not should) even sell bing. 5 years ago, no one would have considered buying the Xbox business.

    This is not a recommendation. This is an analysis. They have to do this. To look where they have strengths and weaknesses. Of course financial strengths and brand strengths don’t always align.

    This guy is basically helping Gates by predicting where shareholder pressure might come from.

    This is great news for Microsoft. They created value out of nothing. Rock on!

  • Ocelotty1

    The Meth is Strong in this one…

  • DarthTigris

    Well … that’s one way to look at it …

  • http://94octane.com Beezer

    I doubt anyone would want to sell Xbox. It’s a household name that makes money.

    Same with office, its the money maker. Bing would be a good sell but the ecosystem has become too reliant on it that they can’t sell it without ruining their product lines.

  • Charles Clarke

    Dumbest ideas ever. Shoot this guy. Nobody slice and dices Microsoft. If this goes to the floor, it may be the first time I found a reason to buy a gun.

  • Xex

    is he serious ……………………….

  • Jacob

    Microsoft is just sucking overall now. I used to think they were sitting atop an untouchable throne made of computer parts and Xbox consoles. But from their recent business decisions and lack of (in my opinion) caring about what the consumers want rather than what Microsoft wants, it seems to me that Microsoft has become too cocky. Believing that whatever they slap together and call the “next generation” or the “future of PC/Gaming” will make them millions and keep them on top.

  • Agosto Nuñez

    Bing and Xbox integrate great with Windows 8, I’m Microsoft is putting these services together, let’s not forget that Bing’s AppEx is the main maker of built-in apps for Windows 8 & R.T.

    Xbox is a great platform to push the unification of T.V. and Cloud-Computing, Microsoft’s innovations shall pay off in years, way more than selling them now to, L.O.L. Samsung XD ¿what was he smoking?

    Also, Samsung is an even more devided company, they produce ships and tanks and whatnot, they’re South-Korea’s Blue Sun (don’t know if anyone will understand that movie reference).

  • Agosto Nuñez

    Here’s why they need to keep those divisions.

  • Garrison Shields

    The XBox has failed to turn an overall profit. There is no indicator that the new console will expand marketshare. XBox, as a brand, is an albatross that eats earnings.