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Microsoft poised to spin-off MSN?

As hugely unprofitable Web operations are worth a fortune, it would be (more) money for free

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Microsoft may announce the creation of a "tracking stock" for its Microsoft Network operations next week, according to US reports. The notion first surfaced in May, and the likelihood of such a move was reinforced by CFO Greg Maffei last month, who said the company would separate out some of the figures for its Internet businesses. Microsoft will report its year-end figures on Monday, and later in the week will hold its annual analysts meeting. Either of these could see the creation of the tracking stock. The difficulty for Microsoft, believe it or not, is that by having its Internet properties operating as part of the Microsoft corporate structure the company is missing a trick. Bill Gates lamented recently that Internet stocks were in a better position to fund acquisitions out of stock. Internet stocks can trade at 50 times revenue, while Microsoft trades at less than half that. See how tough it is being rich? By moving towards operating MSN as a separate company, Microsoft would fix that problem, and a couple of others. A separate company will be useful if the DoJ case goes badly for Microsoft, and the remedies include a break-up. MSN will also be in a better position to recruit staff, as the stock options would likely be better. Microsoft has historically been able to attract staff via good stock performance, but earlier this year company president Steve Ballmer told staff of a restructuring of compensation which recognised that options wouldn't be so valuable in the future. In normal financial terms, MSN oughtn't to be a wildly attractive stock. Microsoft's chequebook has made it a major Internet property, but it could be losing around $500 million on a turnover of $800 million to $1 billion. But in Web terms, seas of red ink tend to attract investors rather than the reverse. And Bill no doubt wants some of that. ®

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