EU-Microsoft Impasse Doesn't Faze Wall Street

Mister Softee's stock slips a bit on the news, but one buy-sider says that just makes it more attractive.
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Updated from 7:45 a.m. EST


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shares slipped Thursday after its top executives failed to reach a settlement in the software maker's ongoing antitrust proceeding with the European Union and said the company would appeal a negative ruling.

The breakdown opens the door to the imposition of marketing restrictions and a fine expected to fall in the hundreds of millions of dollars when European Union Competition Commissioner Mario Monti proposes a final penalty in Brussels next week.

Shares of Microsoft were recently down 49 cents, or 1.9%, at $24.65, a fairly subdued reaction.

"I guess you could chalk me up as one of those guys that doesn't view it as that big of a deal," said Alex Vallecillo, a senior portfolio manager at National City Investment Management Co., whose funds hold 2.4 million Microsoft shares.

"At the end of the day they're probably going to end up paying some money to the EU to resolve this thing once and for all and make some product modifications," he added. But "the scope of what I've heard doesn't worry me."

In a draft EU ruling, Microsoft was found culpable of engaging in monopolistic abuses of its dominant position in the software market. Among other things, regulators object to the way it packages video- and music-playing program with its Windows operating system, which runs more than 90% of the world's computers.

The EU is expected to propose that Microsoft remove Media Player technology from Windows or require computer manufacturers to install competitive media players with Windows. The ceiling for EU fines is 10% of a company's global sales, which would be north of $3 billion in Microsoft's case, although nothing that large is anticipated.

"We worked very hard to try to resolve these issues without litigation," Microsoft Chief Executive Steve Ballmer said in a statement Thursday. "Because of the tremendous value we attach to our relations with governments all across Europe, we made every possible effort to settle the case, and I hope that perhaps we can still settle the case at a later stage."

Microsoft brass, including Ballmer, were trying to avoid the ruling by reaching an accord that would have extended the marketing restrictions to a more global scale, but the two sides were unable to settle in negotiations that ended Thursday.

"We made substantial progress toward resolving the problems that had arisen in the past, but we were unable to agree on commitments for future conduct," Monti said at a news conference. "In the end I had to ... decide what was best for competition and consumers in Europe."

The actual amount of the fine is expected to be decided Monday and officially announced by the EU on Wednesday. Microsoft, however, appeared more concerned about other remedies than the fine.

"We have to ensure that the law is not just about competitors' complaints about the impact of new features," Microsoft said in a statement. "There needs to be consideration of the needs of consumers for new innovations. Consumers must be part of the equation. Perhaps the courts will provide the clarity that is necessary to resolve these issues. Today is just another step in what could be a long process."

Goldman Sachs analyst Rick Sherlund suggested one reason Microsoft may be so set on fighting the EU is because its next plan is to embed a search engine in its operating system. Consequently, the company "feels it may be important to establish their right to continue to innovate in the operating system," Sherlund wrote in a note Thursday.

Still, he said he does not view unbundling the Media Player as a serious change in Microsoft's business model.

Despite the likely continuation of the five-year EU antitrust saga in court, Sherlund said he still expects Microsoft to reach a decision on how to use its cash by its July analyst day meeting. In the past, the company has cited the EU case as one obstacle blocking action on its cash

"In any event, we do not expect a draconian outcome from the antitrust case and expect this will be a short-term disappointment for the stock," added Sherlund, who has an outperform rating on Microsoft. (Goldman has done banking with the company.)

Vallecillo, meanwhile, suggested any short term hit to Microsoft stock is a buying opportunity, noting that it's at historically low levels. On a forward price-to-sales basis, the stock has not been as low since late 1995, he noted, while on a forward P-E ratio basis, it hasn't been this low since early 1994.

"I think net-net this is a great thing because the more they drive the stock down, the more I'll buy it," he said of Thursday's news from Europe.