Heat Is On Microsoft, but All of Tech Sector Feels It
Microsoft Corp. shares plummeted Monday as investors confronted a double-barreled threat to the company’s growth prospects: its first quarterly sales disappointment in more than a decade compounded by fears that the federal government will call for a corporate breakup in its antitrust case.
Microsoft shares fell 15.6%, to $66.63, mostly on news of the company’s glum assessment for the current quarter and the coming year in one of its biggest single-day declines in the company’s history.
The drop placed the stock at 44% below its record high of $119.94, reached earlier this year, as more than 156 million shares changed hands in trading on the Nasdaq Stock Market. That’s a record volume for Microsoft and the third-biggest single-day total for any stock in history.
Wall Street professionals largely attributed the scale of the sell-off to the company’s earnings announcement last week, when it reported that earnings for the quarter ended March 31 rose by 23%, exceeding estimates, but that revenue rose only 23%, less than investors expected.
Even more damaging were projections by the company’s chief financial officer, John Connors, that revenue growth would fall dramatically to the mid-teens from the mid-20% range in the 2001 fiscal year, which begins in July.
“Microsoft last missed a quarter [that is, fell short of investors’ expectations] 11 years ago,” said W. Christopher Mortenson, an analyst for Deutsche Bank in New York. Because the securities markets were closed for Good Friday, Monday was the first chance investors had to react to the news.
The lower-than-expected revenue results prompted several influential Wall Street analysts to downgrade the stock on Monday morning.
Goldman Sachs technology analyst Richard G. Sherlund cut his rating to “market outperform” from “buy” and remarked that the company’s reliance on personal computer software might limit its growth, as businesses and consumers embrace new computing devices that don’t require that software.
“There is an increasing risk that Microsoft might atrophy on the PC platform as IBM did on the mainframe platform, while robust growth shifts to hand-held and wireless devices,” Sherlund wrote.
Microsoft, which controls 90% of the market for PC desktop operating systems, is struggling to make the transition from the desktop to the Internet, where it faces more competition and a threat from alternative operating systems.
The Internet is pushing the personal computer from its dominant position to just one of a growing constellation of digital devices: mainframe servers, game machines, hand-held personal organizers, smart cell phones and interactive pagers, among much else.
Adding to investor anxiety about the company’s growth prospects are indications that federal officials favor breaking up Microsoft as a penalty for its antitrust violations.
Sources in Washington said Monday that the Department of Justice not only favors such a breakup, but wishes to impose some sanctions--such as forbidding discriminatory pricing of Microsoft’s Windows software--even before the software giant appeals a federal court finding that it violated antitrust laws.
The tougher-than-expected proposal, together with the falling stock price, could increase pressure on the software giant to return to the negotiating table to settle the landmark antitrust case.
Joel Klein, head of the antitrust division of the Justice Department, telephoned entertainment, computer and financial industry executives over the weekend to ask their opinion of the government proposal. Atty. Gen. Janet Reno has also been briefed, sources said.
However, neither the Justice Department nor the 19 states that have joined the antitrust suit against Microsoft have made a final decision on punishment of the world’s leading software maker. Government lawyers say they plan to spend this week weighing their options before filing a final plan in U.S. District Court in Washington on Friday.
Other sources said that attorneys general from the 19 states were hashing through competing ideas, and may offer a separate plan. One proposal gaining favor with the states would split off Microsoft’s highly profitable Office software division, which makes Word, Excel and other applications, from the rest of the company.
It remains unclear whether whether the states will file a separate brief, or will side with the the Justice Department’s remedy proposal.
Sources say the Justice Department is leaning toward a plan that would divide Microsoft into two companies: one that sells the flagship Windows operating system and a second that would market all other products, including Microsoft’s lucrative Office software for word processing and other business productivity applications.
The draft proposal also would seek to impose immediate restraints on Microsoft’s dealings with computer makers and Internet service providers. Those restrictions would include forcing Microsoft to license Windows to PC makers at one uniform price so the company could not charge high prices to computer makers it does not favor.
An applications split-off would force the Office suite to compete with applications by Corel, Sun Microsystems and others to get onto computers running Microsoft’s Windows operating system as well as those using Linux and other alternative systems.
But it would be far less onerous than a three-way fracturing that would also split off the Internet Explorer browser and the Microsoft Network.
Many industry observers doubt that a Microsoft breakup can be achieved as cleanly as, say, the breakup of AT&T; in 1984.
“The analogy to AT&T; is amazingly naive,” said analyst Mortenson. “That was a group of separate operating divisions. Microsoft is one company. There’s an infinite number of ways to break it up but no clean, straightforward way to do it.”
Separating the applications business from the operating systems business might leave investors with shares in two companies with less combined value than the unified company, argued Mark Specker, an analyst at Wit Soundview Financial in San Francisco.
“The operating systems part would be a cash cow, but have fairly constrained growth prospects,” he said. “The applications business has better growth prospects but there’s a risk that Microsoft might mis-execute. Under the current system, the cash cow pays for that risk. This would probably not be a good breakup to hold.”
Microsoft spokesmen did not return several calls seeking comment Monday. Under a fast-track schedule set by U.S. District Judge Thomas Penfield Jackson, Microsoft has until May 10 to file its response to any remedies plan filed by the government. The judge will begin a remedies hearing on May 24.
Legal experts say Jackson’s fast-track remedies schedule doesn’t allow much time for consideration of the economic consequences of a far-reaching remedy such as a breakup, although the jurist can modify his time table.
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