Should Microsoft Split the Company in Two?

Every year, analysts argue about whether or not Microsoft (NASDAQ: MSFT) should be split up. Stifel Nicolaus is leading the charge this time around, arguing that the firm needs to divide its key businesses into separate units.

"The time has come for MSFT's Board to begin serious discussions around splitting the company into Software (MBD and Server & Tools) and Device (Windows, Xbox, Phone, Bing, etc.) segments and distributing one to shareholders on a tax-free basis, as a new publicly traded entity," Stifel Nicolaus researchers wrote in their report.

"Management preaches about the operational and R&D synergies from having all these entities together, but we no longer believe this is true and feel the current structure is slowing innovation, causing inefficient capital allocation, and leading to missed revenue opportunities."

While Stifel Nicolaus' concerns are understandable, innovation has never been stronger at Microsoft. One only needs to look at the company's research site to see a glimpse of what Microsoft is developing.

"Additionally, given the diverging margin structures of these units, especially as MSFT increases its hardware presence, the true value of the Software business is being obscured," Stifel Nicolaus added. "We realize this isn't the first time the break-up of MSFT has been suggested, however, given the increasingly heterogeneous post PC-centric world the company operates in, we believe such a move would help ensure the future viability of each business unit and maximize long-term shareholder value."

Shares of Microsoft are up less than one percent this year. The company rose more than three percent in 2012.

Windows 8, Microsoft's latest operating system, sold 40 million licenses in the first 30 days of release. The company has not released any sales figures beyond the initial period.

Microsoft's next major product could be a game console. The company is expected to unveil the third Xbox this June at the 2013 Electronic Entertainment Expo. Microsoft is also rumored to be developing a handheld game machine, which may turn out to be an Xbox-themed Surface.

In fact, Surface Pro is already capable of running most high-end PC games. CNET found that it could run Portal 2 "at close to max settings." The $899 starting price might be a bit too high for the average Xbox owner, but Surface Pro's capabilities show that Microsoft is already positioning itself for portable gaming.

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