Goldman Sachs Gives Microsoft Thumbs Down, Suggests Split

Goldman Sachs had downgraded Microsoft from "buy" to "neutral," criticizes the company's efforts in mobile computing, and most radically, suggests that the company carve out its consumer business from its enterprise one. This is just one more sign that Microsoft could use a vision overhaul.

In a note to its clients, Bloomberg says, Goldman Sachs analysts pulled no punches about problems that face Microsoft. Key among them, they wrote, is that Microsoft needs to gain "a firmer foothold in the growing migration to mobile devices."

The report also warned that Microsoft isn't likely to make any headway in mobile this year because "Apple's iPad and iPhone plus Google's Android operating system are well established."

That's putting it mildly. Windows Phone 7 will have to be a spectacular success if it's to make any headway not just this year, but in the next several years as well. And Microsoft may try to sue Android out of business, but technology, not lawsuits, are going to have the lead the way.

The report was unusually blunt, reports Todd Bishop in TechFlash. Here's an excerpt from the introduction:

"We believe the intrinsic value of shares cannot be unlocked if the status quo remains, and we have increased caution near term on a more elongated PC refresh cycle, combined with the newer threat of notebook cannibalization from tablets, where Windows does not yet have a presence."

That may not sound strong to you, but in the world of Wall Street, it practically constitutes a smackdown.

The most radical part of the report, though, suggests that Microsoft "carve out" its consumer businesses from the company. Here's an excerpt Bishop quotes:

"A break-up of the consumer businesses could potentially unlock hidden value, or more discipline on cost could turn the businesses into contributors to profitability and shareholder value. For example, the Xbox products could be an appealing stand-alone entity, given the historical success of the Xbox and the products' brand strength, and the business could show unlocked value with forced cost discipline compared to as a piece of Microsoft. To date the company's comments suggest that management still sees significant value in combining the consumer and enterprise efforts, but we view a foot in both camps as preventing a successful focus on one strategy, a la Oracle in the enterprise or Apple for consumers."

Microsoft CEO Steve Ballmer will follow this advice approximately when hell freezes over.

I'm not convinced that carving up the company is the best strategy. Wall Street typically focuses on short-term gain rather than long-term vision, and this suggestion is one more example.

However, the report is right that Microsoft has failed when it comes to mobile --- and mobile is the future. Unless Microsoft figures out a way to succeed there, it will never again deliver the kind of growth expected of top-tier technology companies.

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