Microsoft : Bing, Too much (expensive)

Sunday, July 24th 2011. | Internet News

Too Costly
Microsoft needs to concentrate on a different kind of search: finding a buyer for Bing, its online search business. Bing is the industry’s distant No. 2 after Google. It has become a distraction for the software giant — one that costs shareholders dearly. The division that houses Bing lost $2.6 billion in the latest fiscal year. Facebook, or even Apple, might make a better home for Bing. A sale would be a boon for Microsoft’s investors.

Microsoft has been pouring money into Bing. The company thinks search makes its offerings in everything from mobile phones to business software more compelling. Perhaps, but there is little evidence to date. And Bing and sites it powers like Yahoo still control only about 27 percent of the United States market; Google has more than twice as much.

Advertisers do not want a monopoly in search, which should assure Bing of future revenue. And Google may be partly hamstrung as a competitor by antitrust inquiries worldwide. But the business has more value to a buyer that could bring it traffic. How much? Microsoft’s online services unit, of which Bing is the main component, had $2.5 billion of sales in the year that ended June 30. Google is valued at about six times sales. At a 25 percent discount to Google, the unit would be worth about $11 billion.

Moreover, there are potential buyers. Facebook already works with Bing. It might be interested in buying the site, keeping more traffic onsite, and perhaps using its data to better tweak search results. That would be a potent weapon in its fight with Google, which recently introduced a rival social network, Google+. Apple might even be interested, given its growing online ambitions, evidenced by its consideration of a bid for Hulu.

In a deal, Microsoft could either get paper in a highly coveted company or cash, which Microsoft, to its credit, has been good about returning to shareholders. Equally, it could buy back stock, as the company trades at nine times estimated earnings, almost a 20 percent discount to the Standard & Poor’s 500-stock average.

On top of any proceeds a sale would bring, it would stanch losses like last year’s $2.6 billion. Without that, Microsoft would have made 10 percent more profit. That is something that should excite even jaded Microsoft investors.

Rethinking Debt

Standard & Poor’s could choose to cut America’s AAA rating even if Congress does a debt ceiling deal. That would force a rethink. The 18 other top-rated sovereigns are either caught up in the European mess or are tiny. Without the “risk-free” benchmark of Treasuries, even ultracautious bond investors would have to get used to credit risk.

America’s $7.8 trillion of Treasury bonds, notes and inflation-protected securities, together with more than $5 trillion of federal housing agency paper and the debt of several insurers, would all be affected if America’s rating slipped to AA, according to S.&P.

For bond investors fixated on AAA credits, there is not much capacity elsewhere to pick up the slack. Other top-rated sovereign entities include the Isle of Man, Guernsey and Liechtenstein, which are tiny. Even the largest of them, Germany, has only 2 trillion euros ($2.9 trillion) of public debt outstanding. Moreover, six of the entities are euro zone members, and several others are closely connected to the European Union’s debt troubles. Only Australia, Canada, Norway, Singapore and Switzerland hold top ratings without such blemishes, but all five have relatively small amounts of debt.

Top-rated companies do exist, but in the United States there are only four of them. That is nowhere near enough to absorb investor demand — even assuming that buyers could get used to relying on corporate, rather than government, credit.

Money market funds, obliged to hold almost all their assets in AAA credits, might be spared a huge sell-off in a downgrade because their rules refer to short-term ratings, and S.& P.’s threat might only apply longer term. For other investors, adjusting portfolio holdings, and even their guiding rules, to include the United States and other AA-rated names should require only modest changes, though banks and some insurers might have to raise capital. And the United States government bond market would still be there, even if interest-rate comparisons with Treasury yields would have to contemplate negative numbers as well as positive.

The biggest impact could be psychological: there would no longer be a globally accepted liquid benchmark viewed as “risk-free.” Fifty years of thinking, and computer models, would need tweaking.

Related For Microsoft : Bing, Too much (expensive)