Updated from 8:30 a.m. EST
soared Monday and helped push up the entire tech sector as investors responded to a judge's antitrust ruling in favor of the software behemoth, expectations of the
lowering interest rates this week and upcoming elections.
A federal judge on Friday ruled that Microsoft's settlement with the Department of Justice was in the public interest and rejected most stricter penalties sought by nine nonsettling states.
Shares of Microsoft climbed $3.94, or 7.4%, to $56.93 in recent trading. Other large gainers Monday included
, which jumped $1.08, or 13.4%, to $9.27, and
, which rose 81 cents, or 9.8%, to $9.08 and announced the launch of a new information integration product. Software vendor
rose 99 cents, or 5.2%, to $20 in recent trading. The Goldman Sachs Software Index surged 5.6% and the tech-heavy Nasdaq Composite Index was up 4.3%.
Goldman Sachs software analyst Rick Sherlund said in a note early Monday that the antitrust case's conclusion clears the way for Microsoft to step up its share repurchases, pay a small dividend or do more acquisitions. Sherlund added Microsoft to Goldman's current investment list with a price target of $65. The company has done banking business with Microsoft.
In Europe, however, where Microsoft is involved in a separate antitrust proceeding, officials were less effusive. A statement issued by the European Commission claimed that its case is "quite different from a factual point of view to the case in the United States."
The European Commission is investigating privacy issues related to Microsoft's Passport program and antitrust issues involving its Windows operating system such as bundling its media player into Windows to block competitors.
The European Commission could seek a penalty of up to 10% of Microsoft's revenue, which total about $30 billion annually. Several civil suits filed by competitors such as
AOL Time Warner
are still pending against Microsoft.
In his note, Sherlund said management might wait for the outcome of the remaining litigation before spending its more than $40 billion in cash. Sherlund said he believes share repurchases are the most likely use of that stash and noted that management has not been receptive to dividend suggestions, though he said perhaps a small dividend is possible.
UBS Warburg analyst Don Young said that while unlikely, if Microsoft would commit an additional $10 billion per year to buybacks, earnings per share growth would be boosted by a compound annual growth rate of 2% to 3%. Young has a strong buy rating on the company and his firm has done banking business with Microsoft.
Erik Gustafson, a senior portfolio manager at Stein Roe, said investors clearly liked the judge's ruling Friday, widely considered as a huge win for Microsoft. But Gustafson did not think Microsoft was the only factor feeding the rally Monday. "I think we've hit some technical levels where the programmers are having to cover some of their shorts," Gustafson said.
"I think there is also some hope that with a change in control of the Senate that investor-friendly tax legislation is passed, and of course, we're a couple of days in front of a Fed meeting, where everyone expects rates to be lowered," Gustafson added. "All of that combines to create some positive catalysts ? that have moved the market higher." Microsoft is Gustafson's largest holding.
U.S. District Court Judge Colleen Kollar-Kotelly on Friday detailed penalties in the outstanding antitrust case involving the nine dissenting states and District of Columbia that largely mirrored those included in the DOJ settlement. That included requiring Microsoft to set up uniform license agreements with hardware vendors and preventing Microsoft from restricting hardware vendors from installing non-Microsoft middleware or services.
She made her approval of the DOJ settlement conditional, however, because she said she believes the court should retain clearer jurisdiction over enforcement and asked both sides to submit amendment proposals to her by Nov. 8.
Prudential Securities analysts said in a note Monday that they believe the U.S. ruling improves the odds of a European Commission outcome by the end of the year that is in line with the DOJ settlement. The firm has a buy rating on Microsoft and doesn't do any investment banking.
Analysts from different investment banks, however, were divided over whether Friday's ruling will affect Microsoft's risk in the private suits. Prudential said it didn't believe the ruling would affect the risk in those other cases, which Prudential characterized as "manageable (if not minimal)" given the company's size and resources.
But Merrill Lynch analyst Chris Shilakes wrote in a note Monday that he believes the decision could benefit Microsoft in the upcoming civil and European Commission cases "by setting a favorable leaning by the courts." Shilakes has a buy rating on Microsoft and his firm expects to receive or intends to seek compensation for investment banking services from Microsoft within the next three months.