Until Nov. 10, Expedia.com, the No. 1 travel site on the Internet, was a little gem hidden inside sprawling Microsoft Corp. But then the site was spun off in an initial public offering that jumped 280% on the first day of trading to produce a market cap of $2 billion. The IPO also freed the 200 employees of Expedia Inc. to be as entrepreneurial as they want--they don't have to ask permission to seek new alliances, expand internationally, or boost the marketing budget. "We've been driving this Ferrari in the suburbs. Now we're taking it out on the highway and seeing what it can do," says Expedia Chief Executive Richard N. Barton.
Is there a lesson in Expedia for the rest of Microsoft? The company has said it will fight breakup--whether imposed or negotiated--as a way to end its federal antitrust suit. But Expedia's declaration of independence raises a legitimate question: Would a breakup really be such a bad thing for the software giant and its shareholders? In fact, there's some evidence to suggest that if Microsoft were broken up along product lines, it might produce an explosion of innovation, new business activity, and new wealth for investors.
This idea has gained currency since Judge Thomas Penfield Jackson handed down his harsh findings of fact last November, signalling the likelihood of a tough "remedy" by the Feds. International Data Corp., for instance, recently issued a 10-page report suggesting that Microsoft should consider a pre-emptive voluntary breakup--and draw its own dividing lines. "If you break them off you let the free market work, and the best technology wins," says Daniel M. Kusnetzky, program director for IDC's operating systems group.
He argues that if Microsoft were to free up its divisions, they'd be able to exploit sizable new business opportunities. For example, the company's Office group might create versions of its word processing and spreadsheet software that could run on the Linux operating system--which is now used by 15 million people worldwide, growing at 25% per year, and avoided at all costs by the current Microsoft.
Also, there are ample precedents to support the argument that the new companies would prosper. The companies created out of the old Bell System monopoly, including those since swallowed up, are worth about $800 billion today, vs. $59 billion before the 1982 court-sanctioned divestiture. Lucent Technologies, which was spun off by AT&T in a $17 billion IPO in 1996, now has a market cap of about $158 billion--and that's even after the stock's 40% drop on news of lower than anticipated earnings.
So far most Wall Street firms have steered clear of placing a breakup value on Microsoft. But Credit Suisse First Boston did some basic calculations and concluded that, at least initially, the parts would be worth more than the whole. Its reasoning: Right now, Microsoft's Internet media properties are a drag on earnings since they're not profitable. If Microsoft were to separate the newer Internet stuff from operating systems and applications, the core businesses--each with more than $8 billion in annual sales and a monopoly of its own--would deliver higher earnings multiples. In addition, Microsoft Network might be compared to Web portal Yahoo! and valued at anywhere from $30 to $50 billion. "The whole thing would be worth more," says analyst Michael Kwatinetz.
Not that Kwatinetz favors a breakup. He and other Wall Streeters believe that could be immensely disruptive. Plus, they reckon a strong Microsoft might come in handy to counter the new might of the America Online-Time Warner combination.
That may be true, but there's also something to be said for the notion of focused, nimble competitors being able to run rings around slower-moving giants. Ask a Microsoft exec. Assessing the AOL-Time Warner deal, Yusuf Mehdi, director of marketing for MSN, recently noted: "AOL has always been nimble and quick. I don't know if they're going to be the same kind of company now."
Creating a handful of feisty independent businesses could certainly fire up morale at Microsoft. Dozens of top managers have left in the past two years to take on the challenge--and potentially enormous rewards--of Net startups. There was certainly no reluctance by employees of Expedia to trade in their Microsoft stock: 96% made the switch. That rousing response speaks volumes about the pent-up energies inside Microsoft waiting to be set free.