Will Expedia pave way for more spin-offs?

Online travel agency Expedia broke away from Microsoft today and was immediately embraced by investors. The early success could play a role in Microsoft's plans as it ponders how to respond to a last week's harsh rebuke of the software giant by a federal judge.

Expedia today jumped more than 270 percent from its IPO price of $14 a share. The spin-off, a first for Microsoft, raised $72.8 million and gave Expedia a market cap of $1.9 billion based on the late-trading price of $51.

Microsoft stands to benefit from its 86.4 percent stake in the company and an arrangement for the travel site to continue maintaining several agreements with Microsoft, such as its position on the MSN Web site.

Expedia's success has caused some investors to wonder what divestiture might be next for the software giant, particularly following the recent findings of fact in the Justice Department's antitrust case against the company. One of the remedies being considered is a breakup of the company.

Microsoft owns numerous Internet properties, from home buying site Home Advisor to new-car buying site CarPoint. But the company has had little incentive to spin off companies--as of September 30, Microsoft had $18.9 billion in cash and short-term securities.

But with the lofty prices investors are paying for Internet IPOs, the money this could raise may be too attractive for Microsoft to overlook.

"If Microsoft can come with another IPO with as promising financials as Expedia, then you can rubber-stamp [that] the after-market performance will be as strong as what we've seen today with Expedia," said David Menlow, president of IPO Financial Network.

Menlow added that he's surprised Microsoft has waited this long to spin off some of its Internet properties and bring further shareholder value to its investors.

Michael Stanek, an analyst with Lehman Brothers, said that "if [CEO Bill] Gates doesn't feel it's core to his business, he can spin it out and may want to hold a controlling interest since it'll be worth a lot of money."

Analysts added that the question of future spin-offs has become more pertinent as Microsoft evaluates what it considers core holdings.

"Microsoft searched its soul and decided it's a technology-enabling company that will help other businesses use Microsoft technology," said Peter Asnit, an analyst with Volpe Whelan Brown.

Home Advisor is one company that analysts say is not a core holding to Microsoft's business or strategy. Consequently, it is considered a company most likely to be divested.

"Home Advisor doesn't fit as well as the others, and it's one that doesn't have a lot of connections back to the company," said David Smith, an analyst with the Gartner Group.

Ali Stewart, lead product manager for MSN, said the company has not announced any plans to change its ownership of Home Advisor.

"We think [Home Advisor] adds value with our tools and technology," Stewart said. She added that Wall Street tends to look at which Microsoft Internet operations have a leadership position and points to those as good candidates for spin-offs.

Meanwhile, she notes that Microsoft has a "core initiative" of meeting consumer needs through services such as searching, shopping, and sending email.

The software giant recently decided to sell MSN's Sidewalk city guides because consumers wanted to buy tickets online but Microsoft did not want to build out that feature, Stewart said. Sidewalk was sold to Ticketmaster Online-CitySearch, giving Microsoft a gain of $156 million on its first-quarter results. Microsoft holds a 9 percent stake in Ticketmaster Online-CitySearch.

In Expedia's case, Microsoft wanted the online travel company to have the flexibility to use stock as currency in striking partnership deals while maintaining a controlling interest in the new company, Stewart said.

The decision to spin off Expedia followed comments Microsoft made during a fourth-quarter conference call in which executives acknowledged they were reviewing a possible "structure" to create a tracking stock. At the time, rumors were circulating that the company would spin off its various Internet holdings, including Expedia and Hotmail, a free email service.

Some analysts, however, said a sale of Hotmail is unlikely because it's part of Microsoft's consumer services strategy. They also note that CarPoint is expected to be a keeper, given the joint-partnership with automaker Ford to create a build-to-order system of buying cars.

While sizing up other criteria for future spin-offs and sales, David Readerman, an analyst with Thomas Weisel Partners, said: "I think the sale vs. [IPO] decision will be a question of where they can get maximum value, and whether they have a management team in place to run an independent company."