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Handicapping the Outcome for Microsoft

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The Endgame

While the

first part of this column examined this week's action in the case, it's time to look ahead. So what does all this mean? What does Microsoft do now? Wait and pray? Try to juice up the settlement negotiations? Ask Jackson for more time?

Nope. I think that



has reached an internal strategic decision that (as I wrote here in

November 1998): "Lose now, win on appeal."

No, let me restate that, because


to lose is never a smart strategic decision. Make that internal strategy decision by Microsoft something like this:

"Put up a good fight, build a record for an appeal, talk a good game, spin this for all it's worth -- but accept that we'll almost certainly get poured out by Jackson, and that our best shot here is to win on appeal, especially after the U.S. District Court of Appeals for the D.C. Circuit has sent such clear signals in previous rulings that they don't buy Jackson's views on this at all. No matter who wins in the Circuit Court, the DOJ will take it to the Supremes, who are less likely to overturn a Circuit Court of Appeals decision than one from a lowly District Court judge."

Am I serious? You bet. Going for a "win on appeal" strategy is a big risk, to be sure, but that's where I think Microsoft is headed.

I don't suggest bad faith on Microsoft's part in the Posner round of negotiations; Microsoft would clearly have preferred to settle this and get back to work. But with the DOJ looking for a tough, structural remedy, and the state assistant attorneys general trying to look good for their politician-bosses back home by pushing for nothing less than full-scale dismemberment, Microsoft must have figured out by now that a settlement can come only on terms unacceptable to them.

Terms, I should say, that I think


to be unacceptable to them.

What does this mean for investors?

Here, very roughly speaking, is how I see the odds from now on out:

  • 30% Chance, Best Outcome: Long term, a good to perhaps very good outcome: a Microsoft unfettered by unrealistic "remedies" cooked up by people who have made their lack of understanding of technology businesses. That assumes that after a fairly drawn-out appeals process -- say, a year or more -- the Supremes tone down substantially proposed remedies involving breaking up the company, and send the matter back down to Jackson for a more rational outcome than his trial-court ruling seeks. Final solution includes limits on Microsoft's future operating decisions and discretion. For investors, this would be good news, but it would also mean a depressed stock price for the duration. As I said the other day, I think Microsoft is already, selling under 100, at an unrealistically low price relative to its value in this market, and that taking away the uncertainties of the Department of Justice action, the stock could shoot up quickly. But this cloud gets harder and harder to sneak out from under...
  • 60% Chance, Workable but Messy Outcome: Fearsome penalties are imposed, probably going beyond controls on Microsoft's future behavior to some division of the company, into two or three parts: Operating Systems, Applications, maybe Internet. For patient and determined investors, this could also be good news, because I'm convinced the parts of Microsoft are worth more than the value assigned today by the market to the whole. But that would be a bloody process, full of uncertainties, and that greater market value wouldn't be achieved overnight. Scary. And I wouldn't be a Microsoft holder during that time of reorganization and uncertainty.
  • 10% Chance, Bad Outcome: In a court-mandated giveaway, a wide release of the source code to Windows, allowing all comers, Linux-style, to modify and sell their own flavors of Windows. A disaster for investors ... and for all of Microsoft's other constituencies, certainly including computer users. Bad too, probably, for the overall stock market.

I may be too optimistic here. Others would put the chance of a good outcome for Microsoft, and its shareholders, as low as, say, 5%. Call me naive. I believe in our courts, and I believe in rationality. So shoot me.

How Soon? How Final?

How long could this uncertainty drag on? A year, maybe two years, I'd say. Even with a quick ruling by Judge Jackson, and assuming no settlement emerges in the meantime, an appeal to the U.S. Circuit Court in Washington could take a while. Following that appeals-court ruling -- itself certain to be appealed to the Supreme Court -- the big question is whether the Supremes choose to take the case on an expedited basis.

There is a provision in law for either side to ask the Supreme Court to accept that appeal -- remember, the Supreme Court could simply decline to hear the case, letting a Court of Appeals verdict stand -- and rule on this quickly, claiming it is in the national interest to do so. Whether the Supremes buy that story or not is unknowable, but I'll be surprised if a final ruling by them comes out in less than a year.

Unless the Supreme Court simply throws everything out --


unlikely -- the case would likely trickle back down to Judge Jackson's U.S. District Court, for a new ruling bounded by the decisions of the Circuit Court of Appeals or the Supreme Court.

Getting to


point could easily take two years, and possibly three.

Remember that speculative timelines for legal proceedings, such as this one, are fragile, iffy things, easily disrupted by lots of external factors. So don't put too much faith in this one.

With Microsoft closing at 93 13/16 Tuesday -- down a little in intraday trading, not necessarily because of the Washington activity -- I think it is still an uncomfortable hold for the near term. To be sure, since the day it went public, Microsoft has been one of those stocks where it always looks wrong, in hindsight, to have sold.

If you have patience, conviction and an iron gut, it's probably a good hold through the next few months.

Me, I like to sleep at night without watching the wires for what's coming out of Washington. The randomness of the market I can handle. The randomness of politics is something else altogether.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, neither Seymour nor Seymour Group held positions in any securities mentioned in this column, although holdings can change at any time. Seymour does not write about companies that are current or recent consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites your feedback at