Microsoft ruling helps knock down Nasdaq
Nasdaq gets clobbered by 7 percent as the jitters hit investors, but don't blame it all on anticipation of the Microsoft ruling.
By R. Scott Raynovich and Paul Elias
April 4, 2000
It was Microsoft Monday on Wall Street, only nobody was celebrating.
After Sunday's news that settlement talks in the antitrust suit against the company had ended, investors spent the day getting more and more nervous about the verdict that Judge Thomas Penfield Jackson would issue against it.
Though the opinion was released after the markets closed, it was clear Monday that Judge Jackson was going to hammer the company. The anticipation made it seem like he was going to hammer the whole market.
NO SURPRISE
This happened even though the market has known for months that Judge Jackson was likely to say Microsoft illegally tried to monopolize the Web browser market. He made his views of the company clear in November when he issued his "findings of fact."
All he did Monday was formalize those findings into a verdict. As expected, much of his ruling dealt with how Microsoft, with its Explorer browser, tried to muscle Netscape Communications 's Navigator browser out of the market.
"In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel -compatible PC operating systems," Judge Jackson wrote. "Microsoft paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Internet Explorer's share of browser usage at Navigator's expense."
UNDER ITS THUMB
Judge Jackson also said Microsoft broke the law by tying Explorer to its Windows systems.
"Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market," he wrote. "More broadly, Microsoft's anti-competitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers."
Still, there was nothing new there. What counts now is the punishment, and the judge said he would fix a punishment for Microsoft "following proceedings to be established." Legal analysts say Judge Jackson is almost certain to conduct more hearings on the matter, hearing arguments from Microsoft as well as the U.S. Department of Justice and the 19 states attorneys general who sued the company.
NEED A REMEDY
After those hearings, the judge could take any number of actions, including breaking Microsoft up in one of several ways.
Regardless of what Judge Jackson ultimately decides to do, Microsoft's fate is far from determined. Company officials vowed to appeal Monday's ruling, as well as any punishment the judge ultimately metes out. It's a process that could take years to resolve.
"This ruling was not unexpected, given the court's earlier findings, but there remain several steps ahead in this case," says Microsoft spokesperson Jim Cullinan. "We believe the American legal system will ultimately rule in our favor and uphold our ability to develop innovative software products."
BLOODY SCENE
This uncertainty may well have been the driver for the furious fall in Microsoft's stock -- and the entire technology industry, for that matter -- on Monday. Business-to-business (B2B) bulls got butchered. Systems manufacturers, chip companies, and hardware makers got fried. Software companies sagged. Few companies were spared.
Of the companies among the Nasdaq Most Actives, Microsoft led the list with a decline of $15.38 (14.5 percent), to close at $90.88, on astounding volume of 127 million shares traded. Cisco Systems , the next most active issue, lost $4.38 (5.7 percent) to close at $72.94, on 60 million shares traded. Oracle ticked off $1.88 (1.5 percent) to close at $76.88, on roughly 33 million shares traded.
The Nasdaq Composite Index lost 349.15, or 7.6 percent of its value, the fifth-largest single-day percentage decline in Nasdaq's history. In point terms, the decline was the largest ever.
NO MO' MO
Hit particularly hard were some of the momentum stocks, particularly those in the B2B sector, that had risen so steeply over the course of the winter. For example, Ariba lost $16.13 (15.4 percent) to close at $88.69, after initiating a two-for-one stock split, and Commerce One lost $31.25 (20.9 percent) to close at $118. Both stocks have lost roughly half their value in the last month. Other heavy losers in the tech sector included Efficient Networks , which lost $50.75 (32.6 percent) to close at $105; Spyglass , down $22.92 (29.6 percent) to $54.63; and Silverstream Software , which slipped $20.38 (27.6 percent) to $53.50.
"Everything is dropping like a rock," said Viraj Parikh, principal of Topaz Capital, during the latter part of the trading day. "It's not good."
Mr. Parikh was quick to downplay the Microsoft factor, saying a number of contributing factors could have added to the sell-off.
"I don't think there's a direct relationship between the Microsoft talks and what's happening in the rest of the Nasdaq," says Mr. Parikh. "This is just a continuation of what's been going in the last week. During the run-up you had everyone get into the technology market. There were no more legs to make it go up. Now on the downside you had so many novice investors in the market, when something like this happens they're going to run away because they don't have any convictions in the individual companies."
A NATURAL
With a steep run-up in technology stocks since last fall, many say it was only natural for the market to blow off some steam. For example, Ullas Naik, vice president of equity research at First Albany, notes that the Nasdaq Composite Index had roughly doubled in a year.
"It's necessary for people to maintain perspective," says Mr. Naik. "The composite more than doubled, so even with an 20 percent correction we're up 80 percent since last October."
Another contributing factor, according to Mr. Parikh, may have been the lack of support from short-sellers. Nasdaq had run up steeply -- over 90 percent -- from levels last summer. Because that feverish bull run had scared away many of the players who "short" stocks (borrow shares betting that they will go down), there was little support from such players as the markets fell. Short sellers typically put the brakes on steep declines because at some point they must start buying shares to "cover" their short positions (buy back shares at cheaper prices to pay for the shares they've borrowed at higher prices).
"All the shorts got scared away," says Mr. Parikh.
Given the difficulty traders had in explaining the volatile markets, it might be said that nobody could easily predict the outcome on Tuesday, even though the government's rulings of law on were released after the market closed on Monday. What exactly was the Microsoft effect? Not many traders could put their finger on it.
"One never knows for sure, of course," says Don Luskin, CEO of Metamarkets.com and an advisor to his company's OpenFund, when asked if Microsoft was the contributing factor to Monday's steep sell-off. "But when the horses are nervous, a little bird flying by can cause them to stampede."
The little bird, of course, was the breakdown in settlement talks in the antitrust case between Microsoft and the U.S. Department of Justice. Over the weekend the two parties were working to resolve their differences over the government's antitrust case. On Sunday, they announced there would be no settlement. On Monday, the government set a time of 5 p.m. Eastern time to announce Judge Jackson's ruling on the case. That left all of Monday for Wall Street to think about it.
Mr. Luskin struggled with the Microsoft issue all morning before deciding OpenFund should dump its entire position -- all 11,500 shares -- of Microsoft, which it did just after noon. Earlier in the day, OpenFund had sold its "Puts" -- options that go up in value as Microsoft shares fall -- which the fund was holding as insurance against its Microsoft long position.
"Yes, we liquidated," says Mr. Luskin. "But not because we think the stock doesn't have any more upside. It was because we held the stock in the first place as a bet on a settlement. With our rationale evaporated, we didn't want to hold any longer."
Mr. Parikh, who manages the Topaz hedge fund, says that in addition to the Microsoft factor, the technology sector was caught in an awkward pre-earnings silent period with little positive news to counterbalance anything negative.
"Right now the market has a 'show me' attitude -- it's been bid up so much, so now it's time to look for results," says Mr. Parikh. "There's a quiet period now, with not much news, so the market's just waiting."
BAD NEWS ALL AROUND
What little news was out was negative. For example, Legato Systems , a storage software manufacturer, pre-announced that the company would be late in filing its quarterly report and would likely have to restate earnings for 1999 because of an audit that discovered sales accounting irregularities. Legato shares lost $22.75 (55.5 percent), to close at $19.75. Stories like these tend to remind investors how ugly it can get when a volatile technology company misses its quarter.
In historical terms, the recent correction in the Nasdaq Composite Index is beginning to rival the correction in August and September 1998, if not the market crash in October 1987. For example, in point terms, Monday's decrease of 349.15 points was the largest ever one-day point drop in the Nasdaq. The next-largest single-day point drops, all taking place in 2000: the 229-point drop on January 4, the 200-point drop on March 14, the 189-point drop on March 29, and the 188-point drop on March 20.
With the Nasdaq at a level of 4,223.68, percentage terms are a better way of looking at things. Monday's decline of 7.6 percent was the fifth-largest single-day percentage decline in Nasdaq history. The 11.4 percent drop on October 19, 1987, remains the largest single-day percentage decline. That day is followed by two other days in October 1987, both of which had 9-percent declines, and then by a decline of 8.6 percent of August 31, 1998. April 4, 2000, now takes fifth place on that list with its 7.6 percent decline.
CALM AFTER THE STORM?
Many experts expected the markets to calm down on Tuesday, but a defining trend will not likely emerge until the tech earnings season starts in earnest next week.
"What happened today was in anticipation of what was going to happen tonight with the Microsoft news," Mr. Naik said shortly after the Microsoft ruling had been announced. "We might have a relief rally tomorrow, but it may be short-lived. We won't have a real rally until some good earnings news comes out."
Mr. Naik believes that earnings will provide relief from the current market gloom, saying, "As of next week onward we'll have some really good news."
Discuss the Microsoft ruling, and its industry and market repercussions, in the Microsoft Ruling discussion in our Think Tank forum, or visit the Discussions home page.
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