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Emery A. Trahan 06.02.08, 6:00 PM ET
As Microsoft struggles to find growth opportunities outside its core Windows and Office software business, it risks becoming the PepsiCo of a decade ago. Pepsi built a portfolio of its core beverage business, along with snack food and restaurant businesses. While there were marketing and distribution synergies between the beverage and snack food businesses, Pepsi diverted attention to an inefficient restaurant business.
Beverages lost ground to competitors. Pressure from Wall Street led Pepsi CEO Roger A. Enrico to recognize the need to "bring all our human and financial resources to bear on our soft-drink and snack businesses." Early in 1997, Pepsi spun off its restaurant business, leading to a 12% increase in stock price.
Emery A. Trahan
While there may be some strategic justification for Microsoft (nasdaq: MSFT - news - people ) to, for example, acquire Yahoo! (nasdaq: YHOO - news - people ), it may find itself at a competitive disadvantage in the online advertising space and lose ground in its software business. Since the announcement of its intent to acquire Yahoo!, Microsoft's stock is down by almost 12%, while the NASDAQ Composite is up by more than 4%. Wall Street does not think this acquisition is good for Microsoft. Meanwhile, Microsoft is struggling in its core software business.
More than a year after launching Vista, the company is besieged by claims that its new operating system is too complex, too hardware intensive, not different enough from Windows XP to warrant switching, etc. Microsoft is facing significant pressures to keep selling XP, allowing customers to wait for the next version of Windows and skip Vista entirely. As Microsoft stretches to compete in new spaces, it risks diverting attention from its core business, resulting in a loss of reputation and profit.
Arguably, the long-term future of the operating system may be at risk, due to new technologies that could lead to network-based software. However, Microsoft may be feeding these alternatives by not focusing on Windows to keep it state of the art and competitive. Non-core acquisitions may be akin to PepsiCo's (nyse: PEP - news - people ) restaurant division, leaving Microsoft less efficient and eroding its core.
Emery A. Trahan is professor of finance at Northeastern University.
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