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Microsoft may spin off Xbox unit

Investors could call for stand-alone status

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Outgoing Microsoft CEO Steve Ballmer gives Justin Gudeman, 14, a gift bag with a new Xbox during a recent grand opening of a company store.

BRYAN MITCHELL / BLOOMBERG NEWS Enlarge Image

Outgoing Microsoft CEO Steve Ballmer gives Justin Gudeman, 14, a gift bag with a new Xbox during a recent grand opening of a company store.

SAN FRANCISCO -- After 13 years of declining value, some Microsoft investors want Steve Ballmer's replacement to take bolder steps to reverse the slide at the world's largest software maker. That could mean spinning off the Xbox video-game business.

Ballmer's retirement as chief executive officer may clear the way for a potential spinoff of the Xbox unit to unlock shareholder value. While a consumer success with $7 billion in annual sales, it's one of Microsoft's lower-margin divisions and doesn't drive sales of the company's core business services and software. Xbox may be worth at least $17 billion on its own, based on Nintendo's revenue multiple, according to data compiled by Bloomberg. Its value should be even higher given that Nintendo has operating losses, Wedbush Inc. said.

Xbox "looks like an attractive stand-alone business that could hold up on its own," said Todd Lowenstein, a Los Angeles- based fund manager at HighMark Capital Management Inc., which oversees $19 billion including Microsoft shares. Xbox "seems like it would be the most mature candidate with the best growth potential and the most established to stand on its own."

Ballmer's replacement will be tasked with boosting the stock price and accelerating growth after Microsoft -- now with a market value of $275 billion -- was eclipsed by Google and Apple. Since Ballmer's appointment was announced 13 years ago, Microsoft has lost $280 billion in market value as he failed to find a hit with smartphones, web searching or tablet computing.

Ballmer, 57, who took over the CEO role in 2000 from Microsoft co-founder and chairman Bill Gates, plans to step down within 12 months, the Redmond, Wash.,-based company said Aug. 23. His last major act before announcing his retirement came in July, when he unveiled a reorganization under which Microsoft reduced the number of its business units to four.

Microsoft's Windows software runs almost 90 per cent of the world's personal computers, and its Office software is the standard for basic workplace applications. Outside of that, it has businesses ranging from supplying the software that runs servers at the heart of corporate hardware to a version of Windows designed for mobile phones. The company is also trying to compete with Google in Internet search with its Bing product and with Apple's iPad with its Surface tablet.

If Microsoft's next leader were to separate the parts of the business that target consumers from those offering enterprise solutions, it may unlock value for shareholders by putting a spotlight on the faster-growing and more profitable divisions, Lowenstein said.

"Whoever the new CEO is, you hope they are given a blank sheet from a strategic front," said Pat Becker, a fund manager at Portland, Ore.,-based Becker Capital Management Inc., which oversees $2.6 billion including Microsoft shares. Microsoft's weakness on the consumer side of its business "begs the question, is the company ripe for these kinds of spinoffs?"

"I just view the Xbox as its own entity," he said.

Tony Imperati, a spokesman for Microsoft, declined to comment on the possibility of a breakup.

The first Xbox went on sale in 2001. The division, which will introduce the third version, Xbox One, later this year, includes game development and an online service that enables gamers to play over the Internet. The business has also announced plans to develop original television content for the Xbox.

Microsoft's entertainment unit, which is mostly comprised of Xbox, had an operating margin in the past 12 months of just 8.7 per cent, versus 34 per cent for the entire company, data compiled by Bloomberg show.

Xbox competes with consoles made by Sony, which will introduce the PlayStation 4 in North America in November, and Kyoto, Japan-based Nintendo, which began selling the Wii U last year.

"There's some value there that clearly could be unlocked if they chose to go that route," Tim Schwartz, a money manager at Bloomfield Hills, Mich.-based Schwartz Investment Counsel Inc., which oversees $1.3 billion and owns Microsoft, said.

 

-- The Associated Press

Republished from the Winnipeg Free Press print edition August 30, 2013 B7

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