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MS spins off Expedia – what do you want to IPO today?

The first of several?

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Microsoft is spinning off its loss-making Expedia travel service, and has filed a registration statement with the Securities and Exchange Commission for an IPO. This may be the first of a number of such offerings, with Car Point having been tipped as another candidate, following a hint by president Steve Ballmer on Monday. This is not the first divestiture that Microsoft has made: in July, the loss-making Sidewalk was sold to TicketMaster-City Search as "a win-win deal", as Microsoft put it. Microsoft had failed miserably with Sidewalk, so the sale was seen as a stop-loss. The IPO is a far cry from the discussion of a tracking stock that had arisen a month or so ago for all Microsoft's loss-making Internet operations. Ballmer was known not to be keen on the idea, since it had little to do with Microsoft's principal business, and he feared it would be interpreted as financial engineering. This may be one of the first moves in which Richard Belluzzo (ex-SGI CEO, ex-HP) has played a role since he was appointed vp of the consumer and commerce group earlier this month, although there was no statement yesterday by Belluzzo about the intended offer. This tends to suggest it was not his idea, although he may have been allowed to put his rubber stamp on it. In FY 1999 (which ended in June), Expedia lost $19.6 million on revenue of $38.7 million, and in FY 1998, there was a $29.5 million loss on just $13.8 million of revenue. Previously the scale of the losses had not been disclosed. Microsoft is creating two classes of shares for Expedia, with "A" shares having one vote, and "B" shares, which Microsoft will retain, having 10 votes, ensuring control. We can determine from the SEC filing statement that Microsoft is seeking to raise around $75 million, because of the size of the registration fee for the offering. This will probably translate into Microsoft retaining about 80 per cent of Expedia. The IPO price is not yet known. Expedia will have to fork out to Microsoft a scale fee starting at $2 million for the first fiscal year (2000) for certain Microsoft perks, like premium placement on the soon-to-be-regurgitated, third-try MSN.COM Website. Microsoft has agreed not to compete with Expedia for three years, but is reserving its options thereafter. The CEO will be Richard Barton, who developed Expedia as a Microsoft employee, with CFO Greg Maffei as Chairman. Microsoft will hope to be able to attract experienced staff, but there is at the moment uncertainty as to whether it would be a good thing for Microsoft staff to move to Expedia as it is not yet known if they would have to surrender their Microsoft options. On the other hand, Expedia would be better positioned to attract new staff and to offer them Expedia shares on a different basis from that used in Microsoft. Microsoft hopes to be able to form new partnerships with travel and service operators using its muscle. The news was not well received by the Street, with MSFT being marked down $4.88 to $91.19, although Ballmer's comment that Microsoft shares and other tech stocks were over-priced did not help, and probably contributed to a sharp decline of NASDAQ. There's a curious side-issue as well. The first wire report about the deal came from Bridge, some 47 minutes before Microsoft's official announcement was published. How strange that the co-author of the brief report was Jennifer Edstrom, the estranged daughter of Pam Edstrom, dubbed a PR guru, "Gates' keeper", and who is a founder of Waggener Edstrom, Microsoft's principal PR firm since 1982. The daughter is the co-author of Barbarians led by Bill Gates [Henry Holt & Co, New York], which was not well-received and which in some ways was an act of revenge by its authors. Edstrom mère had been concerned that her journalist daughter might spill the beans from inside knowledge about Microsoft in the book, but in the event, it revealed very little. Waggener Edstrom played no role in the Expedia announcement as Edelman handled the press relations, as it usually does for corporate announcements. It is unlikely that Edstrom Jr was given a hint by a mother frustrated that WE was not handling the announcement, because WE itself had proposed that other PR firms be used. Nonetheless, it is curious, as Microsoft was obliged not to leak this news as it was subject to SEC rules - and Microsoft is already under investigation, again, by that very body. ®

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