SAN FRANCISCO -- Thanks to
Neil Sedaka, everybody knows breaking up is hard to do. Figuring out the breakup value of
is darn near impossible.
But that didn't stop many on Wall Street from trying
Monday, when a 4.8% gain by the beleaguered software giant helped move the
Nasdaq Composite Index
up 97, or 2.5%, and the
Dow Jones Industrial Average
higher by 78, or 0.7%.
analyst Michael Stanek offered the most detailed and publicized analysis. He placed a 125- to 135-a-share breakup estimate on Microsoft, for which -- in case you hadn't heard -- the
Friday recommended splitting into two separate entities: the Windows operating system and Office software applications.
Stanek got to his estimate by assigning a price-to-revenue multiple of 17.5 times for the Windows business and 27.5 times for the applications operations. He also went a step further than the government -- which is hard to imagine -- and considered the breakup value of Microsoft's Internet business, to which he assigned a multiple of 50 times revenue.
The multiples were derived by comparing Microsoft's units with the current valuations of publicly traded entities operating in similar businesses. (For sanity's sake, let's not question those valuations at this time.) So the Windows, or "platform" business, was compared with
while the Internet operations were compared with a "basket" of publicly traded, consumer-focused names, Stanek said. There was no adequate comparison for the applications business, he conceded.
The analyst then took the estimated fiscal 2001 revenue for the Windows, application and Internet divisions of $10.5 billion, $11.9 billion and $3.8 billion, respectively, and multiplied them by the respective multiples. Those figures were then divided by the 5.5 billion Microsoft shares outstanding, resulting in share prices of 33.41, 58.94 and 34.06 (again respectively, in the same order). Add those together, plus Microsoft's "non-operating assets" -- its cash and investment portfolio -- and you get 133.67, the high end of Stanek's price range.
analyst Christopher Shilakes assigned a multiple of 15 times revenue to the Windows business and a multiple of 17 times revenue to the application operations. From that, he deduced breakup value of 70 for Microsoft, based on 2000 revenue. Shilakes was not available for additional comment.
Melissa Eisenstat of
CIBC World Markets
was playing it really safe. She assigned a "valuation range" for the disassembled Microsoft of between 52 and 134, subject to review as "more granular data" about the operating units are made available. The report didn't offer much insight into the methodology, and I ended up playing phone tag with Eisenstat.
Don't fret if you're confused as to how Wall Street's best and brightest could come up with such disparate findings to the same question. Several, such as W. Christopher Mortenson at
Deutsche Banc Alex. Brown
and Joseph J. Farley of
Donaldson Lufkin & Jenrette
chose not even to attempt to value the sum of Microsoft's parts.
"Give the lack of details about the breakup as well as Wall Street's proven collective inability to value existing tech stocks over the past few weeks, looking out four-plus years strikes us as close to impossible," Mortenson recently wrote.
Stanek conceded the whole episode was a "mental exercise" designed to preempt the inevitable "what if" questions salesmen and some clients were bound to ask.
But institutional money managers aren't "all that wrapped up around this," the analyst conceded, noting most assume the company ultimately will not be broken up (as does he).
Discussions with several buy-side sources confirmed that sentiment. The professional investors remain focused on the here and now of Microsoft's fundamentals, rather than the theoretical value of a bifurcated entity.
"For me, it's not relevant," Jeff Van Harte, manager of the
Transamerica Premier Equity fund, said of the breakup possibility. "It won't be reality until the appeal process is concluded. I think by that time, we'll be back to figuring out the real operating fundamentals of the company."
Van Harte, whose fund is long Microsoft, said future PC sales and the inroads of Windows 2000 are more important than the proposed breakup.
Erik Gustafson, manager of the
Stein Roe Growth fund, which is also long Microsoft, was more blunt: "I could care less what the breakup value is. I don't think it's going to happen. And if it is
broken up, the sum of the parts is worth a helluva lot more" than the value Wall Street is currently placing on the whole.
Brian Gilmartin, portfolio manager at
Trinity Asset Management
, which is also long Microsoft, agreed.
"Do I care about the breakup value? Not really," he said. "I think too much of the decline is attributed to the legal problems, and not enough to the reality," which is that the product cycle for Windows 2000 has just gotten under way.
"Until we start getting some positive news on Windows 2000, it'll trade between here and 100 anyway," Gilmartin said.
The most important takeaway in all this (IMHO) is that there is a consensus on Wall Street that Windows 2000 is going to prove to be a powerful catalyst to re-energize Microsoft's earnings.
"The good news is, even if
my estimates are off 30% to 40%, I still can rationalize the stock going higher on fundamentals," Stanek said. "This time next year, these guys will be in the tall cotton because the comparisons will be so easy and the product cycle will be cooking. No one is doubting the strength of Windows 2000."
How to value Windows 2000 as a key component of a stand-alone entity is another issue altogether. But it's one investors who believe the government won't disassemble Microsoft need not fret about.
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at