Calling Agent Mulder: The Microsoft Files

The (Much) Lighter Side

From the "standing on the shoulders of giants" department, I humbly bring you an extension of the conspiracy theories regarding Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks).

Let's assume the company is sandbagging the Street, as Michael Murphy of the California Technology Stock Letter suggested to Herb Greenberg. The question being pondered by some of the conspiracy theorists (and there are a lot of them) on Wall Street is whether Rick Sherlund of Goldman Sachs is in cahoots.

Sherlund, as you've no doubt heard, removed Microsoft from Goldman's recommend list Monday in the wake (ostensibly) of the company's disappointing first-quarter revenue and decidedly downbeat, forward-looking comments released Thursday evening.

Sherlund was far from alone in cutting numbers and/or recommendations, but he is clearly the most influential analyst when it comes to Mister Softee. His downgrade was cited as a big catalyst in the stock's near 15% decline Monday. Tuesday, it rebounded modestly, and closed up 3.75%.

So the theory (such as it is) goes like this: Microsoft's primary goal -- aside from world domination -- is to avoid a government-mandated breakup. By dampening expectations for its business outlook and thus its stock, Microsoft is betting a great cry of despair will arise from the investing public (who are big-time shareholders either directly or via mutual funds), thus pressuring the politicians to back off from a most Draconian settlement to the antitrust case.

Some of the more conspiratorially minded folks on Wall Street believe the downgrade from Sherlund was part of that effort.

"Microsoft is looking for the sympathy vote," said one Wall Street participant. "Sherlund, I'm sure, is helping."

The source, who requested anonymity (imagine that?), also noted that Goldman "wins" even if Microsoft is broken up, because the brokerage firm likely will receive the underwriting business for any spinoffs. Stuff like that gets the "Area 51" crowd -- who generally love any conspiracy involving Goldman (it's an old story) -- in a frenzy.

Andy Laperriere, an associate managing director at the International Strategy & Investment Group in Washington, is not among them; he declined to speculate on the conspiracy theory. But the analyst did say the politicians are clearly paying close attention to how this nasty antitrust business (as the Brits would say) is playing in Peoria, Springfield and Lubbock, etc.

Concerns about Microsoft have been the catalyst for (at least) two "pretty ugly days in the market," Laperriere noted. "If the market stays down, you will see Republicans saying this is one of the reasons. Probably quite a few investors and voters will conclude that's right -- that [the antitrust case] is at least partially responsible for what's happening in the Nasdaq."

No doubt some investors already have come to that conclusion. (If you're so disposed, write your congressman! Billy Gates & Co. need your help!)

Meanwhile, Sherlund is on vacation this week, and so unavailable for comment. A Goldman Sachs spokeswoman declined to comment in his stead.

In a report Monday, the analyst -- who's long been bullish on Microsoft and defended the stock in written reports and on CNBC earlier this month -- mused that the company's shares could decline into the 65 to 70 range. That would give the company a P/E of about 38 times, based on his estimated 2000 earnings of $1.78 a share.

"That's appropriate for a company capable of sustaining about 15% growth vs. our earlier 20% estimate," he wrote, suggesting the stock he'd recommend so heartily at (much) higher levels isn't a bargain despite suffering a large (and unseemly) haircut. Microsoft closed at 66 5/8 Monday, leaving it some 44% below its 52-week high.

And in what could be viewed as an off-the-top-rope, atomic spine-breaker maneuver on his once-beloved underwriting client, Sherlund warned "there is an increasing risk that Microsoft might atrophy on the PC platform as IBM (IBM Quote - Cramer on IBM - Stock Picks) did on the mainframe platform, while robust growth shifts to hand-held and wireless devices."

The rational, reasonable and logical answer to all this is that Sherlund was perhaps overly focused on the Justice Department lawsuit when he defended the stock earlier this month, and was genuinely shocked and chagrined by the company's dowdy conference call. The analyst now sees a far less-favorable outlook for Microsoft and is raising issues such as the potential demise of the PC -- which isn't a new risk -- to justify his newfound pessimism and accompanying lowered estimates.

As unlikely as it is that Gates or Steve Ballmer called Sherlund and said "Here's the plan," the timing of the downgrade and his corresponding negativity has the cigar-filled backroom crowd wondering: Why now?