Getting even with Microsoft?

Dear Mr. Berko:

In February 2000, you wrote that I should buy 100 shares of Microsoft, which I did at $112, and a couple of years later, it split 2-for-1. I now have 200 shares, but my cost is $56 a share. And even though sales and income and dividends have done very well, I have a big loss, and the stock has never come back to what I purchased it for. Why has the stock price done so poorly? Is there any hope that I will get even?

FL, Fort Walton Beach, Fla.

Dear FL:

Holy succotash and Jumping Jack Flash, you're the second person in the past month who has accused me of recommending Microsoft in early 2000. On occasion, I've been accused by readers of losing it, and on occasion, I probably have lost it (I remember most of the times), but I'm bingo-certain I never recommended Microsoft between 2000 and 2012. Though, in the past two dozen months, I've suggested that MSFT may have appeal for accounts seeking dividend growth and suggested purchasing the stock at the bottom of its annual trading range, between $26 and $28. However, there's an outside chance that MSFT will return to your cost basis.

It was said of Andre the Giant, who was 7 feet 4 inches tall and weighed 500 pounds and won the World Wrestling Federation title belt, that if you smacked him in the big toe with a fungo bat, it would take seven minutes before he would respond to the pain. And so it is with Microsoft (MSFT-$33). This company is so huge that it can take a week for a letter mailed from MSFT's boardroom to reach the CEO's office in the same building. Size is wonderful if you're a wall, a planet or an oil well but counterproductive if you're competing in a "Jack be nimble, Jack be quick" world of instant-gratification technology. Monster companies like MSFT have the technical brains but can't innovate or initiate smoothly, because every step of the process (development through execution) is like running a foot race (barefoot) on a track of chunky peanut butter. MSFT's stock performance "sphinx." The bloom is off the rose, and most of us remember the allegory about old roses. Kodak, Burroughs, Polaroid, Xerox and Sperry Rand are examples of once monster-sized technology companies - with high price-earnings ratios - that faded from glory because they were too big to succeed, to innovate and initiate.

In late 2001, when MSFT settled its antitrust suit, in which the government proved the company was a monopoly, the Department of Justice demanded MSFT be divided into two companies. Well, Microsoft's lawyers prevailed, and it was thrown out on appeal. MSFT has tripled in size since, and though Apple may be making more money, MSFT became involved in more things, such as writing operating systems, designing apps, running cloud-based services, creating hardware and writing software for corporate servers -- plus adding an unprofitable online services division. In 2001, MSFT had a $21 billion cash surplus; today that number is $79 billion. Because Steve Ballmer is going fishing, some big shareholders are suggesting that a new CEO must dismantle MSFT into five "mini Bells." They believe that this would generate shareholder value and eliminate what Kurt Eichenwald calls Microsoft's tangled mess of internal conflicts and bureaucratic paralysis.

An AT&T-style divestiture could look like the following: 1) Business Division, with $24 billion in revenues, would run Windows and earn revenues from service support and consulting. 2) Desktop Applications, about $19 billion in revenues, would operate PC software and systems and maintain and improve apps for customers around the world. 3) Server & Tools, also with $19 billion in revenues, would service MSFT's business customers. 4) Entertainment, with revenues of $10 billion, would include Xbox, Skype, Windows Phone, etc. 5) Online Services, with $3 billion in revenues, would include Bing, MSN and Expedia.

As stand-alone spinoffs, those five divisions could have a combined market value of $70 to $80 a share. So the sum of the parts might be worth more than the whole, and you might get even.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2013 Creators Syndicate Inc.

Published: Fri, Sep 27, 2013

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