Microsoft Shares Volatile After Justice Department Forgoes Breakup

There was much ado about Microsoft, mostly from investors interpreting the news.
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Updated from 3:49 p.m. EDT

Investors trying to parse the meaning in recent news surrounding

Microsoft

(MSFT) - Get Report

sent the shares of the software giant bouncing back and forth.

The hubbub centered around a pair of recent announcements: As expected, the Justice Department said it wouldn't seek to break up the software firm in its antitrust case and traders tried to figure out exactly what the company's chief financial officer meant when he regurgitated the company's financial guidance at an investment conference.

Microsoft's shares were knocked around by the tempest in a teapot, trading as high as $58.39 and as low as $55.95 before lunch. At the close of regular trading, Microsoft shares were down $1.72, or 3%, at $56.02.

In a statement issued Thursday, the Justice Department said it not only wouldn't seek a breakup of the company, it also wouldn't seek a further ruling on whether Microsoft illegally tied software to its operating system.

In short, the Justice Department said it didn't have to pursue either of those issues because a June 28 ruling from the U.S. Court of Appeals upheld the heart of its case: that Microsoft had illegally maintained its monopoly in personal computer operating systems.

In view of that, which it called the "core allegation in the case," the Justice Department issued a press release saying it believes "pursuing a liability determination on the tying claim would only prolong proceedings and delay the imposition of relief that would benefit consumers." The release also said "the department is seeking to streamline the case with the goal of securing an effective remedy as quickly as possible."

No News Is Good News

"This is no news," said Erik Olbeter, an analyst for Schwab Capital Markets Washington Research Group. "What the Justice Department is saying is that they already have enough ammunition to get the remedies they want."

Those remedies could include requiring Microsoft to share technical information about its operating system with competitors so that they could efficiently write software programs that will work with it, or restricting the way the company can charge for the operating system. For instance, the court could prohibit Microsoft from charging companies that are developing competing products a premium for its ubiquitous operating system.

"We're moving toward some sort of open access ruling on Microsoft. The question is how broad it is and how do you enforce it," Olbeter said.

Ernest Gellhorn, a law professor at George Mason University who follows the case closely, said the development does put pressure on Microsoft, because it means the two sides won't waste time arguing over issues such as a breakup or the tying claim, which had effectively been set aside by the appeals court ruling in the first place.

"Microsoft could see the resolution of the case occurring more quickly, that the urgency of settlement is higher, and that this could be concluded before the release of Windows XP. That would put pressure on Microsoft," Geller said.

Of course, the pressure was there all along. Microsoft has been racing to release Windows XP, the next version of its operating system, as quickly as possible, setting Oct. 25 as its general release date.

Last week, the district court judge presiding over the penalty phase of the case asked both sides to submit proposals on how the case should proceed by Sept. 14. She also scheduled an initial hearing for that phase on Sept. 21.

Reiterating the party line it's maintained since the June 28 ruling, Microsoft said it's working to get the case behind it.

"We are committed to resolving the remaining issues in this case," says spokesman Jim Desler. "We are working with the government to comply with the district courts order in terms of a joint status report, due a week from tomorrow."

He'll Say It Again

As far as Microsoft's financial guidance is concerned, confusion engulfed trading desks Thursday. At an investment conference hosted by SG Cowen in Boston on Wednesday, CFO John Connors reportedly reiterated the numbers the firm gave financial analysts on its last quarterly conference call, when it said fiscal 2002 revenue should be between $28.8 billion and $29.6 billion, with earnings of $1.91 to $1.95 per share. That drove the stock higher on Wednesday, as investors interpreted the news as a sign that Microsoft was doing well despite the weak economy.

But on Thursday, Microsoft said Connors' statements were mischaracterized. The CFO didn't reiterate guidance, a spokeswoman said, but merely maintained what the company said previously.

"There's a fine line between the two," says Katy Fonner, a spokeswoman for Microsoft at its public relations firm, Waggener Edstrom. "He wasn't giving an update. In fact, he was just saying that we haven't given an update since the numbers we gave in quarter four. Then, he gave those numbers as a courtesy to the group he was speaking to."

Wall Street observers yawned at that information as well, though the company's splitting hairs over terminology was hardly viewed as an endorsement of robust business at the firm. With the release of Windows XP coming in October and the current slow spending environment in technology, that's to be expected, analysts said.

"My take is that they maintained

guidance yesterday, which really amounts to no news," says Christopher Galvin, an analyst at JP Morgan H&Q who rates the company a buy. "They're certainly not saying that business is going better, but I think they were proactive in assessing some of the specific issues that confront them in the September quarter: Number one, a poor environment, and number two, the calm before the storm in the light of the upgrade that will kick off in the December quarter." (Galvin's firm hasn't done recent banking for Microsoft, but Galvin maintains a long position in the stock.)

The calm before the storm, indeed.