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Updated from 8:13 a.m. EST

Shares of


(MSFT) - Get Microsoft Corporation Report

sank Monday to reflect the software behemoth's massive dividend due next month, but investors were spared a drop worth the entire value of the $3.08 payout.

The shares were recently trading at $27.45, down $2.52, or 8.4%, from Friday's close of $29.97. The stock is currently trading ex-dividend both the special $3 payout and Microsoft's regular 8-cent quarterly dividend, meaning a buyer doesn't receive the money if he acquires the shares now.

Microsoft announced the special dividend, which comes to about $32 billion and is the biggest such giveaway in corporate history, and doubled its annual dividend to 32 cents from 16 cents on July 21. Both the special dividend and quarterly dividend will be paid Dec. 2.

Microsoft's special dividend came in response to pressure from shareholders demanding that the company share some of its enormous cash hoard, which soared to $64.4 billion on Sept. 30. The company is also buying back $30 billion in shares over the next four years.

The possible behavior of Microsoft's shares following the ex-dividend date has been the focus of some debate on Wall Street, particularly after a 7% run-up in the stock this month. Stock prices usually fall by an amount corresponding to the value of their dividend after the right to receive it expires, but other factors -- including the enormous amount of unused cash on Microsoft's balance sheet and the possibility investors will use the special dividend to buy more shares -- have complicated the calculus thistime around.

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As many

expected, Microsoftshares did not drop the full $3.08, in keeping with the experience of other companies who have distributed special dividends. Instead, demand for the stock may be helping to offset the fulldecline from the dividend.

Another reason the stock may not be declining the entire $3.08 is the stock already was trading based on lower earnings estimates. Microsoft lowered fiscal 2005 earnings guidance in July to reflect thedecline in cash and investment income that will result from the dividend, and analysts ratcheted down their analysts accordingly soon after.

Analyses by at least two software analysts found that the stock of companies who have paid special dividends declined less than the full amount of the dividend.

In a review of five other companies that offered special one-time dividends in the past year, UBS analyst Heather Bellini found that their stocks on average fell by 81% of the payout. In his analysis of37 companies that paid special dividends during the past several years, Goldman Sachs analyst Rick Sherlund found that the average stock-price decline on the ex-date over the prior trading-day closewas 71%, and the median was 81% of the special dividend.

Microsoft's decline falls at the high end of that range, currently at about 82% of the dividend payout.

The fact that many investors value software stocks (including Microsoft) based on price-earnings ratios also may be a contributor to a smaller decline in Microsoft shares Monday. Sherlund pointed outin a research note earlier this month that investors' tendency to value software stocks based on price-earnings ratios, without explicit consideration of excess cash, could help the stock price recapture anylost value from a dividend-related decline as a resulting lower P/E attracts investors.

"This does not say much for the sophistication of valuation models for software stocks where P/Es and PEG ratios have traditional been used (largely because this has traditionally been ahigh-growth/momentum-oriented sector), but we believe the market may not have explicitly valued the cash to begin with," he wrote. (Sherlund has an outperform rating on Microsoft and his firm has donebanking with the company.)

However, Sherlund noted that if investors explicitly consider Microsoft cash in their valuation, as he did in a discounted cash flow, the stock value should go down $3 to reflect the lower cash balance.