November 7, 5:27 pm Eastern Time
Microsoft seen dropping as antitrust
cloud darkens
By Martin Wolk
SEATTLE, Nov 7 (Reuters) - Microsoft Corp.
(NasdaqNM:MSFT - news) stock could be depressed for
months in wake of a federal judge's preliminary ruling that
makes it virtually certain the software giant will face sanctions
for stifling competition, analysts said on Sunday.
A court-ordered breakup of the world's biggest computer software company, while still seen as
highly unlikely, became more conceivable after U.S. District Judge Thomas Penfield Jackson's
207-page opinion was issued Friday and backed government antitrust regulators on nearly every
point.
Microsoft stock fell in off-market trading after the judge's decision and analysts said they expected
it to drop 5 to 10 percent Monday when Nasdaq activity resumes. Bill Epifanio of J.P. Morgan
calculated Microsoft already has underperformed the rest of the Nasdaq 100 by about 9 percent
in the past month as investors have braced for the ruling.
Some analysts said the ruling could boost stock of Microsoft rivals like America Online Inc
(NYSE:AOL - news). and Oracle Corp (NasdaqNM:ORCL - news).
Even short of a breakup, state and federal antitrust regulators will be emboldened to seek
fundamental changes in the way Microsoft does business, making a settlement improbable and
setting the stage for an appeals process that could last for years, analysts said.
CLOUD OF UNCERTAINTY OVER MICROSOFT
Rick Sherlund, an analyst for Goldman Sachs, said the ruling was an ''ominous'' turn of events that
will darken the cloud of uncertainty over the company, leading to renewed speculation about its
fate at least until Jackson's final decision and order, expected in February or March.
''It was very clearly a rout against Microsoft,'' he said. ''His language was harsh, and his
conclusions were one-sided.''
While Jackson had been expected to side with the government in the crucial ''findings of fact,''
which lays the groundwork for the final ruling and possible sanctions, Sherlund and others said the
document was even more critical of Microsoft's business practices than had been expected.
''The tone of these findings was far more negative than I ever expected,'' J.P. Morgan's Epifanio.
Microsoft lawyers will continue to argue in court that the company has not violated antitrust laws,
seizing on the few paragraphs of Jackson's opinion that supported its defense, including a finding
that its investments speeded development of the Internet and made Web-browsing easier for
consumers.
But investors now can safely assume the final decision in the case will back the government, adding
at least a long-term element of risk in the stock.
Investors who can tolerate that risk might elect to buy Microsoft when the stock dips, reasoning
that any court-imposed remedy, no matter how harmful to the company's competitive position, will
be postponed until after all appeals are exhausted, which easily could be 2001.
''This is truly the early innings of a long ballgame,'' Epifanio said.
'ODDS OF SETTLEMENT GO DOWN'
Bill Whitlow, a Safeco Corp. mutual fund manager, said Jackson's ruling does little to change the
prospects of a company that has been under a regulatory microscope for years.
''The one thing that does change is that the odds of a settlement in the case go down,'' he said.
He argued that even if Microsoft is broken up, as some of its rivals have proposed, overall
shareholder value would rise.
Epifanio disagreed, saying the most widely discussed breakup scenario, splitting Microsoft into
three companies for operating systems, applications and Internet operations, would eliminate
technical synergies and cross-platform bundling that have helped propel its bottom-line growth.
A more radical proposal to split the company into three or four identical ''baby Bills'' would be
''disaster -- purely disaster,'' Epifanio said.
''Nobody even knows if four Microsofts could survive,'' he said.
That leaves the more likely possibility that a court will impose remedies changing the way
Microsoft behaves toward computer makers and other software companies. But in the rapidly
evolving computer industry it becomes nearly impossible to calculate how such changes will affect
Microsoft after a lengthy appeals process.
''Once they've exhausted the appeals process the industry is going to look a lot different than it
does now and certainly different than it did when Microsoft committed these acts,'' Whitlow said.
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