MS stock dips after breakup ruling

SEATTLE: Shares in Microsoft Corp. on Thursday lost ground despite bullish comments from Wall Street analysts that the stock was worth buying even after the Federal Judge ordered the software titan broken in two.

Microsoft jumped 1-5/8 to 72-1/8 when the Nasdaq stock market opened but then gave up those gains and more to close down 1-11/16, or 2.4 per cent, at 68-13/16. Some 47 million shares were traded, compared to 40 million on an average day.

On Wednesday, US District Judge Thomas Penfield Jackson ordered the breakup of Microsoft into an operating systems company and an applications company, saying that would stop it from breaking antitrust law. He also ordered a raft of restrictions on the way Microsoft does business, including further opening up the source code for its Windows operating system to other software makers. The fall in the stock came despite several "buy" or "strong buy" ratings on the shares from Wall Street analysts, most of whom predicted a long appeals court battle before the case goes to the US Supreme Court.

Analysts said earlier that it would take time to assess the impact of the judge's ruling on Microsoft's business. Of most interest for the near-term is whether the company will succeed in staying all or most of the conduct remedies, set to take effect in 90 days. Many analysts have said two Microsofts would be worth less than one mainly because the stand-alone operating systems company would be restricted from adding new features and could see its product become quickly commoditized. They also say a breakup will destroy the way Microsoft can leverage its products off one another - lowering the price of Windows to sell more applications, and selling more copies of Windows by developing more applications.

Donaldson Lufkin and Jenrette analyst Joe Farley said a breakup of the company was unlikely and the share price could easily top $100. "We think the possibility of a breakup could cause these shares to trade to the low $50s, but we believe that the possibility of such a scenario is unlikely," he wrote. Farley reiterated his firm's $140 price target on the stock and a "buy" rating.

Thomas Weisel analysts said the worst-case scenario would value Microsoft shares at $50 to $55: $20 for the operating company, $25 for the applications company, and $5 to $10 for cash and other assets. Some analysts, such as Boston-based technology consultants Aberdeen Group, were quick to say the harsh ruling, which mirrored the US Justice Department's proposals, would carry a high price tag for the US economy.

"After weighing increased costs for business operations, increased costs for systems integration, and continuing costs for litigation and regulation, as well as loss of shareholder value, Aberdeen estimates that the financial damage caused by the split-up will exceed $43 billion," Aberdeen said. Prudential Securities analyst Doug Crook said that if the company were broken in two, he would put the stock price at $75. Prudential cut its 12-month price target for Microsoft to $90 from $125 but reiterated its "strong buy" rating on the shares.

Most analysts said they did not believe Microsoft's promised appeal would go straight to the Supreme Court, despite plans from the Justice Department to fast-track the appeal. Instead, they said the appeals process would take up to two years to rule in the case. "We predict that by-passing the Court of Appeals and going directly to the Supreme Court is highly unlikely," wrote Lehman Brothers analyst Michael Stanek. They also said it was likely that Jackson's breakup order would be stayed pending an appeals court ruling, allowing the company to remain intact.

(C) Reuters Limited 2000.