(MSFT) CEO Steve Ballmer has had his share of criticism of late, with another rush coming today as a result of David Einhorn’s negative comments. My thoughts are a lot less critical of Mr. Ballmer, at least as a “software guy." In fact I think he is a great software guy, and in my view the best Enterprise Software CEO on the planet. Under his leadership, MSFT has built the most successful enterprise software business in history. What he seems not to be good at is the consumer side of his business – that would encompass MSFT’s Web properties and mobile efforts. (Xbox is an exception, but in its formative years it was run very independently.)
For fun, I made some quick “back of the envelope” calculations on the value of MSFT’s non-Windows client enterprise software business. The results are probably not a surprise to those bulls that follow the name closely, but they are telling nonetheless.
MFST’s MBD and Server and Tools business is growing at ~14% this year. According to MSFT reported metrics, it produces Operating Margins in the 47% range. To adjust for Admin expense, I added 7% GA expense (the prorated Admin expense indicated by MSFT), and used the MSFT provided Operating Income breakout. As an independent business I think adjusted Operating Margin would be in the 42-43% range. I used revenue estimates that are Street average.
I used Oracle
(ORCL) and Check Point Software
(CHKP) as comps, placing MSFT slightly higher than ORCL but well below CHKP. MSFT is growing faster than ORCL, but has lower Operating Margins than CHKP. See the table below for the details.Summary
MSFT’s Application and Server software business alone would be a $40 bln/year business, creating $18-19 bln in cash. Given this would be the largest software business in the world, a reasonable valuation would be $23.50/share (using the current share count). That’s only $1/share below the current value of the whole business (which I would guess is worth at least $12-14/share). This analysis makes a decent case for breaking up the company – at least from a shareholder perspective.
An interesting case study of the "Ballmer knows enterprise software and not consumers" thesis will be the Skype acquisition. I think it will be a brilliant addition to MSFT’s enterprise software business via a close integration with its unified communications offering (Lync, Exchange and Outlook). Success in the enterprise and a lack of progress on the “consumer” side will be very telling.
Here are the details of my calculation:
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