Investors Will Pass Judgment Today on Ruling in Microsoft Case

A federal judge has ruled that Microsoft Corp. is a monopoly, and now Wall Street will render its verdict on the judge’s decision.

How shares of the world’s most valuable company trade today will say a lot about investors’ concern--or lack thereof--over the ultimate outcome of the government’s antitrust case against the software giant.

Analysts also will be watching to see how the action in Microsoft’s stock affects the rest of the highflying technology sector. Many tech shares have been red-hot in recent weeks, powering the Nasdaq composite index over the 3,000 mark last week.

Some money managers said over the weekend that what’s bad for Microsoft should, by definition, be good for many of its bitter rivals, from Sun Microsystems to Oracle Corp. to America Online.

But a dive in Microsoft’s shares would be a drag on the best-known stock index, the Dow Jones industrial average, which closed Friday at 10,704.48. Dow Jones & Co. added Microsoft to the 30-stock Dow just one week ago.

After-hours trading in Microsoft on Friday, following U.S. District Judge Thomas Penfield Jackson’s late-afternoon ruling, took the shares as low as $86.75 after the official close of $91.56 on Nasdaq.

As investors have braced for the court decision, the stock has barely budged in the last month, after falling in late summer from its record high of $100.75 in mid-July.

Some analysts are downbeat about the stock’s near-term prospects. Although Jackson’s ruling was preliminary, its harsh language in describing Microsoft’s power could embolden state and federal regulators to seek fundamental changes in the way the firm does business, making a settlement improbable and setting the stage for an appeals process that could last for years, analysts said.

Rick Sherlund, an analyst with Goldman Sachs & Co., said the ruling was an “ominous” turn of events that will darken the cloud of uncertainty over the company.

“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 more critical of Microsoft’s business practices than had been expected.

J.P. Morgan analyst Bill Epifanio agreed. “The tone of these findings was far more negative than I ever expected,” he said.

But how that sits with Microsoft’s army of institutional and individual holders remains to be seen. The stock sells for 61 times the company’s most recent 12-month earnings per share, already a lower price-to-earnings ratio than is commanded by stocks such as Sun Microsystems, AOL, Cisco Systems and others.

In other words, Microsoft’s stock valuation already appears to factor in some expectation of trouble compared with other tech leaders.

Bill Whitlow, a Safeco Corp. mutual fund manager, said Jackson’s ruling does little to change the prospects for 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.

But at a total stock market value of $472 billion Friday--making the company by far the world’s most valuable in investors’ eyes--some analysts question whether the sum of Microsoft’s parts would be more than the current whole.

Epifanio said the most widely discussed breakup scenario, splitting Microsoft into three firms focusing on operating systems, applications and Internet operations, would eliminate technical synergies and cross-platform bundling that have helped propel its bottom-line growth.

One interesting test of Microsoft’s standing with investors will be this week’s planned spinoff of the company’s Expedia Inc. online travel service.

Expedia plans to sell 5.2 million shares at $10 to $12 a share. Microsoft will retain 86% of the stock.

The spinoff, in the works for months, could conceivably boost Microsoft’s own share valuation if the market puts a high price on Expedia. Indeed, one of Microsoft’s goals with the offering, analysts say, is to highlight the value of its many in-house Net-related ventures.

If investors do bail out of Microsoft’s stock this week, it isn’t clear that the selling will drag down other tech stocks.

In fact, the prevailing hunger for just about any tech-related business may turn Microsoft’s loss into a gain for other tech stocks, said Robert Streed, strategist for Northern Trust in Chicago. “Because people want to own tech stocks, if you’re reluctant to buy Microsoft because of the cloud hanging over the company, [part] of your technology money could be diverted into other investment ideas,” he said.

That is what happened when IBM Corp. shares collapsed between mid-1992 and late 1993, when Big Blue faced perhaps the greatest crisis in its history amid slowing sales and huge write-offs.

As the acknowledged leader among tech companies back then, IBM’s woes could have been viewed as a sector-wide problem. Instead, investors correctly viewed them as company-specific. When investors dumped IBM, they rushed into stocks of many smaller tech firms--some of which were a root cause of IBM’s competitive troubles.

As IBM plunged, the Nasdaq composite index soared 45% between mid-1992 and late 1993.

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Times staff writer Tom Petruno contributed to this story along with Reuters and Associated Press.