Protracted Trial Dragging Down Microsoft Stock

WASHINGTON -- As government lawyers continue to tear apart the testimony of Microsoft (MSFT) witnesses, fund managers with big stakes in the company are starting to acknowledge that the company's stock is suffering from investor fears that Microsoft could lose the antitrust trial.

"The stock has acted somewhat weak lately, and it's probably because people are concerned about the trial," says Jeff Van Harte, manager of the $290 million (TEQUX)Transamerica Premier Equity fund.

Since closing at 175 on Jan. 29, Microsoft stock has fallen 15%, more than twice the 6.5% drop of the Nasdaq Composite Index during that time. Microsoft watchers and investors say the daily tidbits of bad news from the trial are starting to have an effect. The stock closed Monday at 148 13/16, up 1 1/16 despite news that two companies had filed class-action suits against Microsoft, alleging the company used monopoly power to overcharge for its software.

Microsoft spokesman Tod Nielsen says the stock price historically dips in February and was due for a pullback anyway, given its huge runup in January. "The trial has certainly not affected it directly," he said Monday.

"The press accounts greatly exaggerate the sideshow of this trial, not the substance," he says. "This is a marathon, not a sprint."

When the government opened its case against Microsoft last Oct. 19, the stock price was barely affected. In fact, the trial coincided with a spectacular runup that saw the price of the Microsoft shares rise almost 65% through Jan. 29, even while the government was presenting its case against the company.

"I think once the government rested and Microsoft got up there, the market anticipated that OK, now the bad stuff is already out there," says Curt Rohrman, manager of the $160 million (USSCX)USAA Science & Technology fund. "But we're not hearing the positive news now that Microsoft is up there."

Monday's session in Judge Thomas Penfield Jackson's federal district court was a stunning example of how bad things have gotten for Microsoft in the trial. David Boies, head of the government's team, shot the testimony of Microsoft executive Dan Rosen so full of holes that, afterward, an observer sympathetic to the company conceded that he came off as a "buffoon."

The case hinges on allegations that Microsoft used its dominant position in operating system software to try to drive Netscape (NSCP), its chief rival in Internet browser technology, out of business.

Rosen, the general manager of new technology who worked to map out Microsoft's browser strategy in 1994 and 1995, was evasive under questioning from Boies. He continually asked Boies to repeat his questions and requested that the prosecutor put them "in context." At one point, the two sparred over which months are included in the season of spring.

Rosen testified that he hadn't seen Netscape as a competitive threat to Microsoft in the browser space at all. He said James Barksdale, Netscape's chief executive, had told him his company actually wanted Microsoft to develop browser technology so Netscape could benefit from other areas of the Internet, such as search capabilities and e-commerce.

But Boies brought Rosen's testimony into question when he projected one of Rosen's own emails onto the courtroom's giant overhead screen. In the May 15, 1995, message, Rosen suggested Microsoft develop a "relationship" with Netscape "to wrest leadership of the [browser] evolution from them."

Boies then asked Rosen why, if Netscape wanted Microsoft to develop a browser itself, he suggested Microsoft "wrest" that very same browser development away from the other company.

"By wrest I mean take," Rosen said.

"You mean [Netscape] should give it to you and you should take it from them when they do?" Boies asked with a sarcastic tone. When Rosen answered yes, laughter spread through the courtroom.

Such has been the Microsoft story over the past several weeks. Hours of tense Microsoft testimony ripped to shreds by Boies's bulldog tactics. But until now, as far as Microsoft's stock has been concerned, the only real hurt was felt in the courtroom -- and in witnesses' dignity.

TransAmerica's Van Harte, who said last November the stock would go up no matter what came out of the trial, says his positive outlook remains. But he's a little less certain about Microsoft's immediate future.

"That's okay," he says. "When you have the position that Microsoft has, and the government is after you, then it's normal for people to be scared for you."

Van Harte and USAA's Rohrman both say they intend to hold on to their Microsoft stakes.

For Microsoft, some temporary relief may be in sight. Jackson issued an order on Monday stating that he wants to wrap up the current phase of the trial, if all scheduled witnesses can be heard, by Friday. The trial would then resume on or after April 12.

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