Microsoft
Story
Should End Happily
By Andrew Leckey
Humpty
Dumpty may be sitting on a wall, but Wall Street predicts the
big guy isn't likely to suffer a great fall.
With so many billions
of dollars at stake, Microsoft Corp.'s antitrust travails are
hardly the equivalent of a child's nursery rhyme. Yet most investment
experts do expect an eventual happy ending for Microsoft shareholders.
Looking at the software
maker's downtrodden stock price, they're chanting in unison:
"Buy Microsoft now."
Even if the firm is
divided up into two companies, as the Justice Department has
recommended, investors should consider the results of government
breakups of Standard Oil in 1911 and American Telephone &
Telegraph in 1984. After an initial malaise, shareholders of
both companies were richly rewarded. Some argue that breaking
a giant company into smaller competitors gives each resulting
firm much more flexibility. On a more worrisome note, uncertainty
surrounding the government's failed attempt to break up International
Business Machines severely damaged that company's share price
for a protracted period. Microsoft's stock has certainly been
under pressure as well, down 40 percent from its high, though
some of that decline also takes into account the fact the company's
earnings growth rate is slowing down.
Furthermore, the Standard
Oil and AT&T antitrust breakups were over product price gouging,
rather than the modern concepts of intellectual property and
denied innovation that are the contentions against Microsoft.
Here are the thoughts
of some investment experts who heartily endorse the stock of
Microsoft:
"Even if the judge
agrees that a breakup is an appropriate penalty, it is unlikely
to hold up on appeal," contends Art Russell, technology
analyst with Edward Jones in St. Louis. "Microsoft is accused
of bundling a browser with Windows software, and the next thing
you know they're hacking off Office as a separate company?"
There's a chance the judge will decide on a behavioral remedy,
he acknowledges. But whatever happens, most of the bad news is
already "embedded in the stock".
"The problem with
breaking up a software company is that it is next to impossible
to draw the line between where the operating system ends and
applications begin," said Andrew Roskill, software and e-commerce
analyst with Warburg Dillon Read. "The Microsoft case is
hopelessly moot because the world has changed, with all technology
markets moving toward monopoly, and shifts in the playing field
keeping everyone honest."
Meanwhile, Microsoft's
release of Windows 2000 and Windows Millennium edition should
encourage a sales resurgence, which occurs every time the company
releases a new product, he noted.
"Microsoft will have to publish the actual computer code
for Windows, thereby leveling the playing field," predicted
Michael Murphy, editor of the Technology Investing newsletter
in Half Moon Bay, Calif. "There's a strong belief in Silicon
Valley that there are hidden "hooks" inside Windows
that only the Microsoft applications people know about, making
its software run better than other people's software."
"Since you're talking about intellectual property and engineers, there's a potential threat that a Microsoft breakup would buck the trend of historical breakups being a net positive for investors," cautioned Jim Lowell, editor of the Fidelity Investor newsletter in Watertown, Mass. "Nonetheless, Microsoft is trading at a price that its largest part would likely trade at, so I consider its stock attractive."
Any type of breakup, whether it involves a marriage or a company, is never seen as a positive thing by the neighbors, Lowell said. That is, until they see there could be more peace and profit as a result, he said.
Even if the U.S. District Court Judge Thomas Penfield Jackson ultimately decides Microsoft persistently violated antitrust laws, no one's sure he will really grant the government's request to split it into one company consisting of the Windows operating system and another made up of its applications software and Internet businesses. In addition, the company wouldn't be split until after Microsoft exhausts its appeals anyway.
Stocks of some other technology firms may benefit by a slowdown in the Microsoft juggernaut and become stronger competitors, Russell believes. In particular, a company such as RealNetworks in speech recognition and America Online on the Internet might be aided by a slowdown in Microsoft's advance.
The applications software maker Corel might also be another beneficiary of Microsoft's problems, added Murphy. Momentum currently seems especially strong for companies building business-to-business relationships, among them Oracle and i2 Technologies, said Roskill. Oracle has a database business that doing especially well and i2 should benefit from its acquisition of Aspect Development.
©2000
