By Stephen Phillips
Microsoft Corp’s share price proved robust in the face of last Friday’s damning Finding of Fact from the US Department of Justice. Investors rallied around the software giant after it’s share price took an initial 7.9% dive and the shares closed only 1.8% down for the day at $89.94.
The limited volatility came as no surprise to Microsoft watchers at the large investment banks who told ComputerWire that they had expected that the shares would not be overly susceptible to adverse newspaper headlines over the weekend.
Andrew Roskill, director and senior software analyst at Warburg Dillon Read LLC, even professed surprise that Microsoft’s share price had taken any hit at all. He said that Judge Thomas Penfield Jackson had failed to pin down the case that Microsoft had breached the US government’s Sherman Anti-trust Act and abused its monopoly position to harm consumers – beyond a vague reference to ‘stifled innovation’. In a briefing note issued before the market opened for trading yesterday, he said: We’d expected a lop-sided verdict, and that’s pretty much what we got. We thought they’d label Microsoft a monopoly, and they did. We’d expected some damaging ‘anti-competitive’ headlines, and we got plenty of them over the weekend. Speaking at close of trading yesterday, Roskill told ComputerWire that Microsoft had been helped by its strong institutional backing on Wall Street. He said that earlier this year, pension companies and investment funds had owned 46% of the outstanding shares in the Redmond, Washington-based firm, and that they had been appraised to expect a negative Finding of Fact.
Michael Kwatinetz, managing director at Credit Suisse First Boston said that that the Finding of Fact’s toll on Microsoft’s share price had already been factored into Friday’s closing price. He said Judge Jackson’s tip-off that he would report the Finding of Fact on a Friday afternoon, before the end of November, had induced portfolio managers, who control large tranches of share in the company, to jettison their holdings before 2pm on the day as a precaution. They were short in the stock on Friday. Even if the judge hadn’t made an announcement they could have bought them back on Monday at break-even, Kwatinetz said. This had been the scenario played out in the previous week, he added, when portfolio managers had hedged their bets in anticipation of a possible announcement. Kwatinetz said that the portfolio managers would have been moved to buy back the shares yesterday as they bottomed out in price after Friday’s announcement. He also speculated that Microsoft itself could have been behind yesterday afternoon’s recovery, seizing the opportunity to buy back its own shares at a discount.
Both analysts said the earlier price slump may have been perceived as a buying opportunity by investors, reflecting faith in the firm’s operational health. Kwatinetz labeled this exceptionally strong at the moment, singling out Microsoft’s product pipeline, including the Windows 2000 operating system, slated for launch early next year.
The Department of Justice’s ultimate ruling, which may hand down penalties to Microsoft is expected in February or March, 2000. Kwatinetz said in a briefing note responding to Friday’s Finding of Fact that Credit Suisse did not expect the DoJ to insist upon the break-up of Microsoft. But if this were to happen, he said, then the firm’ value to shareholders would at least be equal to the intact company’s value, partly because the cost [of products] to consumers would go up.
While the Finding of Fact’s impact on Microsoft’s own share price was limited, some of the company’s adversaries reaped spectacular share price gains. Investors flocked to Red Hat Inc, which distributes the Linux open source operating system, a competitor to Windows. The Durham, North Carolina-based company’s stock surged more than 21% to close at $104 a share. Meanwhile long-time Microsoft nemesis, Apple Computer Inc, with its Mac operating system, rose 9.13% to close at a record price of $96.37, and Sun Microsystems Inc, the creator of the Java programming language rose 2% to a record closing price of $111.87.
