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May 25th, 2000

[10:30 AM] Analysts Offer Conflicting Views About Breaking Up Microsoft
by Wes George

Richard Sherlund of Goldman Sachs appeared on CNBC this morning to point out that Microsoft is more than the sum of its parts. If the company is broken up, he forecasts the stock could be worth about 15% less than it is today, while Microsoft's chief rivals Oracle, Redhat, Sun Microsystems and AOL will be the main beneficiaries. Mr. Sherlund, a PC analyst, neglected to mention Apple in his list of Microsoft's rivals.

For more on the current breakup proposal, read more in our coverage from yesterday: "How About A Microsoft 3-Way? Judge Jackson Pushes Breakup Forward."

Mr. Sherlund called yesterday's hearing with Judge Jackson a "stunning defeat" for Microsoft and he predicted that as early as next week the Judge will order the dismemberment of the company. Microsoft's only hope, he said, lies in the appeals process.

Mr. Sherlund notes that Microsoft's synergy as a single company will disappear if the company is divided, producing negative results for shareholders. Some of the problems he expects are loss of key employees to rivals and a failure to execute on the next generation Windows OS. He thinks that most of the management will go with the software applications spin-off, thus effectively "neutering" the OS division.

Also, the various parts of Microsoft have different product cycles. Broken up, the earning stream will become much more volatile. Investors naturally pay less for shares of companies with volatile earnings.

Dave Algers of Fred Algers Management has a different take on the Microsoft antitrust trial. He believes that Microsoft's game plan is to delay their case while in appeal till the Republicans win the White House and undo the leadership at the Department of Justice, in effect unraveling the government's resolve to defeat Microsoft through political pressure and appointments. Mr. Algers gives his scenario a 70% chance of coming to pass.

Other analysts, such as those at Donaldson Lufkin and Jenerette concur with Mr. Algers, believing Microsoft will beat this rap on appeal.

The Mac Observer Spin: Duh. It only makes sense that if Microsoft is a monopoly and is illegally leveraging its dominant position in the IT world then broken up those ill-gotten advantages will cease to exist. The various companies torn asunder from the Microsoft monopoly will have to swim or sink on the merits of their products rather than rely on their market dominance for the first time in a decade. Can they do it? Investors hate uncertainty. Mr. Sherlund could well be right -- Microsoft is worth more as a monopoly than as a bevy of fairly competing companies.

That said, in the past shareholders of monopolies broken up by antitrust courts have historical benefited from such radical remedies. Shareholders of Microsoft, should it be divided, would receive shares in the all of the newly partitioned companies. Should those companies thrive, shareholders could see better returns than Microsoft --a fully mature corporation -- could promise to deliver alone.

As for Microsoft beating the breakup on appeal, that seems as if it has been Microsoft's plan all along. The company made a mockery of the court proceedings throughout the trial (false testimony, faked videos, and the like), it often seemed as if they had little concern over winning or losing during the current round. In addition, it has already been shown that the company was putting a lot of stock into what they hope will be a much more favorable Republican administration. Should George W. Bush be elected president, it is probable that he would replace the current antitrust officials (such as Joel Klein) in the DOJ with ones less amenable to breaking up Microsoft. Couple that with a traditionally more conservative appeals court above Judge Jackson that has been known to rule against him, and Microsoft does stand a good chance of beating the breakup on appeal.

Of course, Judge Jackson has already suggested that he would try and put the entire case on the fast track to the Supreme Court which would not only greatly shorten the appeals process, it would bypass the appeals courts in question. Microsoft has vigorously protested such a move as any delay in the trial works to their benefit.


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