A Mild Penalty for Microsoft Stock
Wall Street gave Microsoft Corp. a vote of confidence Monday, the first trading day after U.S. District Judge Thomas Penfield Jackson lambasted the company’s business practices as monopolistic and predatory. The company’s shares dropped as much as $7.18 in early trading but rallied to close at $89.94, down only $1.63, in heavy trading on Nasdaq.
Some market watchers had expected a much larger drop--on the order of 5% to 10%--to go along with substantial gains by the software giant’s chief competitors.
The stinging condemnation contained in Jackson’s findings of fact Friday--and the likelihood the judge will rule that the Redmond, Wash.-based company violated the Sherman Antitrust Act--provoked fears that uncertainty about Microsoft’s future could disrupt the high-tech market.
The company faces formidable challenges in numerous areas, including electronic commerce and the race to supply software for Internet-connected appliances, such as hand-held computers, cable-TV boxes and cellular phones. Meanwhile, it is confronted with the rising popularity of Linux, an insurgent computer operating system that competes with Windows. Some industry watchers expected Jackson’s ruling to lead investors to decrease their Microsoft stakes substantially.
But the modest drop suggests that investors expect the company to navigate its antitrust minefield effectively, at least in the short run.
Some analysts view the company’s legal position as stronger than the media and competitors have suggested. If Microsoft secures an out-of-court settlement, its stock could benefit. If not, the legal proceedings could drag on for years with little immediate effect.
In the long run, Microsoft could still win the case on appeal, they say.
However, a few Microsoft competitors posted spectacular gains in the ruling’s wake--including Red Hat Inc., the largest provider of Linux software, which many analysts say could seize a large share of the operating-system market in years to come.
In Nasdaq trading, Red Hat jumped $18.06 to $104; it touched $109.50 during the session. But analysts downplayed the long-term significance of Red Hat’s rise, given the stock’s volatility.
“Red Hat is in the long run an interesting idea, but its valuation is extremely lofty,” said Jimmy Chang, an analyst with U.S. Trust in New York. “It is such a young company, and it’s more driven by day traders than long-term investors.”
But some more established companies also rose sharply on the Microsoft news.
Apple Computer, whose Macintosh represents the only mass-market alternative to Windows-based PCs, surged $8.06 to close at $96.38 on Nasdaq--an all-time high.
Even Corel Corp., the struggling maker of a set of productivity software that has been crushed in the marketplace by Microsoft’s Office suite, gained $1 to close at $7.81, a nearly 15% rise.
But the largest and most powerful Microsoft rivals--including Web titan America Online, Internet technology provider Sun Microsystems, network software vendor Novell and database leader Oracle--saw their stock rise more modestly.
“In the end, the market is rational,” said Chang, reflecting on Sun’s performance. “It is a very long-term benefit to Sun if the government can exert long-term control over Microsoft, but not so much an immediate benefit.”
Overall, analysts agreed that the market greeted Jackson’s ruling with relief. Even bad news removes uncertainty, and the company’s immediate prospects remain strong despite the antitrust cloud.
“The market doesn’t like uncertainty,” said Michael Stanek, an analyst with Lehman Bros. in San Francisco. “I was surprised that [Microsoft’s stock] didn’t go up. So many people had built expectations that this was going to be the result” of the judge’s deliberations.
Several analysts reemphasized their buy ratings, arguing that confusion over the pending decision has been artificially depressing Microsoft’s shares. The company is undervalued, they say, given its strong performance in recent quarters and the upcoming release of Windows 2000 early next year. That product, a successor to Windows 98, is expected to boost revenue substantially.
“They are now in the biggest product cycle in the company’s history,” said Chris Galvin, an analyst with the technology investment bank Hambrecht & Quist in San Francisco. Windows 2000 “is really the foundation of their Internet strategy and product portfolio. With tech stocks, generally, people want to hold them in front of product cycles,” he added.
In September, Microsoft President Steven Ballmer said tech stocks in general, and his company’s in particular, were overvalued. Stanek suggested that those comments, which pushed the entire market sharply lower, may have been intended to depress Microsoft stock so the company could get a better price as it buys back shares--which Microsoft’s board has authorized through next year.
In the long run, Stanek added, the challenges stemming from the antitrust case “may help Microsoft become more fierce as a competitor.”
* NO JUGGERNAUT: Microsoft has had mixed success at best outside its core software business. A1
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The Market’s Judgment Microsoft’s shares fell only modestly Monday after a judge ruled Friday that the company is effectively a monopoly, but the stock has been drifting in a narrow range since late August--while shares of rivals such as Apple Computer and Sun Microsystems have led the latest tech-stock rally. Weekly closes and latest:
