Analysis of DOJ case (positive for MSFT) from Joe Arena's newsletter:
Don't know if anyone posted this viewpoint:
With the recent 17% decline in Microsoft stock, and the latest 74% blowout
earnings report becoming a distant memory, there are a myriad of investors
searching for answers. There are many different explanations for this
correction. One, the parabolic chart pattern; the stock had simply come too
far too fast despite the company's growing dominance. Two, the realization
that Dell cannot continue to defy the law of large numbers forever cast a pall
over Microsoft and most of the technology sector. Three, the perceived threat
that IBM's support of Linux could represent a major paradigm shift. (we have
discussed this at length in a previous edition of The High Tech Arena, and do
not at this juncture see any material impact on earnings going forward)
Notwithstanding, the market is a discounting mechanism, and the most salient
rationale for the pullback in Microsoft stock is related to an increasing
cognizance that the DOJ will win round one of the trial. Certainly, the rash
of legal blunders and lack of preparedness that Microsoft lawyers and
witnesses have displayed has been most disconcerting for investors to watch.
For those shareholders glued to CNBC daily, the appearance of Hampton Pearson
documenting another daily legal faux pas has been agonizing as well.
Certainly, the courtroom brilliance of David Boies, who has succeeded in
stultifying virtually every Microsoft witness, has also been a major factor in
shaping the perception that the DOJ will prevail.
Lest investors lose sight of the big picture here and get too concerned, we
assert that this first round is merely a tempest in a teapot. First and
foremost, the unique nature of the trial obscures the fact that Microsoft has
submitted voluminous evidence in preparation for an inevitable appeal which
has not been rebutted. The flamboyant courtroom theatrics of David Boies
sells newspapers and draws traffic to biased anti-Microsoft web sites, but at
the end of the day will have little bearing on winning the case.
It is well within the realm of probability that the appeals process (which
should drag on well into 2000 at the very least) will find for the defendant,
as the deck has been stacked against Microsoft in several ways. The Justice
Department has had over three years to prepare for the case, compared with
only 8 months for Microsoft. (could this be why their lawyers and witnesses
alike appear to be so inept)? This fact in and of itself could very well be
sufficient to overturn a negative ruling. Consider that in a typical antitrust
case, just the discovery process can take in excess of one year. What else
bodes well for a Microsoft appeal in this veritable kangaroo court? It can be
surmised that Judge Jackson is prejudiced in this case, and we must reiterate
the significance of the appeals court overturning his preliminary injunction.
Furthermore, Microsoft lawyers have done at least one thing well, and that is
being exceptionally diligent in terms of conforming to technical procedures.
This further increases the odds of a reversal by an appeals court.
Finally, and perhaps most significantly, since Microsoft has been limited to
only 12 witnesses, they have been precluded from cross examining all those who
have submitted written testimony against them. (this is contrary to a
constitutional right) As an example, consider a case where a murder witness
presents written evidence, but cannot testify because she is dead. In this
scenario, the evidence is not admissible.
That being said, what if the unthinkable occurs and Microsoft loses? The
most obvious remedy would be breaking up the company. (anyone think Microsoft
is being proactive by the recently announced reorganization)? This remedy
would be highly unlikely, as something intangible as intellectual property
cannot be divided in the same manner that Standard Oil and AT&T were. A
breakup would also adversely affect consumers, (who really want and benefit
from standards) and would also make life very difficult for independent
software vendors. In terms of corporate customers, it would create an
incredible morass of expenses and inefficiencies. Ultimately, a breakup would
benefit no one except Microsoft's competitors and those seeking to further
their legal/political careers. Nevertheless, the bottom line here is that
history shows a breakup will be beneficial to shareholders. (if it is not for
some reason, this could precipitate the mother of all class action suits by
shareholders against the DOJ, which none of the parties concerned want to
happen)
One remedy which is somewhat more likely to occur would be the government
forcing Microsoft to publish its source code to independent software vendors
in order to facilitate innovation. This does not mean that Microsoft would be
forced to give away its secrets, but rather incorporate new ideas provided by
independent software vendors in future upgrades. This remedy will probably
become irrelevant given the length of the appeals process in an industry that
is measured in dog years. With the success that Linux has had to date, you
can be sure that Microsoft not only has Linux on its radar screen, but will
implement the practice of making their source code available long before it is
imposed on them by the DOJ.
The DOJ could also decide to impose temporary patent protection, similar to
what is done in the pharmaceutical industry. However, given the rapid change
inherent in the software business, by the time a patent expired, it would most
likely be irrelevant in the marketplace.
We continue to believe that the most likely scenario will be a lengthy
appeals process ultimately decided by the Supreme Court, with Microsoft
prevailing. Throughout this process, there will be 15-25% corrections in the
stock price, as nervous Nellie's dump the stock on some recent short term
negative developments. These should be used as buying opportunities, as
historically any such correction in the stock price has proved to be. Short
term, we believe most of the anticipation of Microsoft losing the first round
is already in the stock price, and see support in the 140 range. |
