Microsoft Tumbles on Lowered Projections, Breakup Reports

Approximately 25 analysts filed negative reports on the software giant's outlook.
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(MSFT) - Get Report

shares fell sharply Monday after Wall Street analysts lowered their revenue estimates for the coming year and some U.S. newspapers published reports that federal antitrust prosecutors would seek to split up the company.

The software giant's shares fell 12 15/16, or 16%, to 66, more than 10% below their 52-week low. Adjusted for stock splits, the shares hit their weakest level since December 1998. (Microsoft closed Monday trading down 12 5/16, or 16%, at 66 5/8.)

Around 25 analysts filed negative reports on the company's outlook, said Joe Cooper, senior research analyst for

First Call/Thomson Financial

, which compiles data on the average views of Wall Street firms.

"None of it has to do with the alleged breakup," Cooper said. Still, he added, "Microsoft is always very conservative with its guidance, but I've never seen the analysts react this way."

After the stock market had closed Thursday before the long Easter weekend, the Redmond, Wash.-based company

reported net income for the third quarter of $2.39 billion, or 43 cents a diluted share, surpassing analysts' predictions by 2 cents a diluted share. But revenue was nearly $100 million below the estimates of the most pessimistic analysts, an anomaly the company did not immediately explain.

By Monday morning, analysts had formulated their own theories.

"We believe corporate PC demand benefited in 1999 from a replacement cycle in anticipation of Y2K, followed by a retrenchment in demand beginning last November and continuing through the March quarter," wrote Rick G. Sherlund, analyst for

Goldman, Sachs

. Sherlund's revision of his revenue estimates on April 12, eight days before the company reported its earnings, was a factor in the stock's 5% fall that day. He downgraded the stock today to market outperform from buy. His firm has done no underwriting for Microsoft.

For next year, different analysts predicted ominous signs, including that PC sales will not accelerate soon and that demand in the sector may shift to software for wireless phones and handheld computers.

Robertson Stephens

analyst Marshall Senk lowered his revenue estimate for 2001 to $26.4 billion from $27.5 billion, a move typifying Wall Street sentiment. Senk rates Microsoft a buy and his firm has done no underwriting for the world's leading software company.

The analysts were reacting to the earnings report and the subsequent guidance from company officials, which was "a little more cautious than usual," said Chris Galvin, analyst for

Chase H&Q

. "Exactly what motivated the revision on guidance is mysterious." Galvin rates Microsoft a buy and his firm has done no underwriting for the company.

Some analysts said the stock's drastic movement may have been accelerated by reports that prosecutors from the

U.S. Justice Department

have shifted their opinion to consider asking a judge to break up the company. Previously, federal prosecutors had advocated remedies that would regulate the company's conduct, not alter its structure.

In the antitrust case, U.S. District Judge Thomas Jackson issued a harsh

ruling April 3, finding that Microsoft monopolizes the market for operating systems, illegally tied products together and employed predatory tactics to maintain and extend its monopoly. Prosecutors are required to propose remedies by Friday.

Federal and state prosecutors are still talking with company officials, both on the phone and in meetings in Chicago, home of the appointed mediator, Richard Posner of the

7th Circuit Court of Appeals

, according to a person familiar with the government's side of negotiations. Posner called off negotiations on April 1, prompting Jackson to issue the second stage of his verdict.

Jackson is due to set remedies in the case by late next month.

With that in mind, Microsoft's dire revenue guidance "may have been posturing," said Galvin, the Chase H&Q analyst. "It certainly does not do them any good to look like a strong-getting-stronger story."

While most of the stock price movement is likely motivated by the analysts' opinions, reports of the Justice Department's new position may have hastened the fall, said James Lucier, analyst for

Prudential Securities

. Still, he noted, investors throughout the trial have shown muted reaction to news reports citing sources close to the negotiations, saving true fervor for major announcements in the case. Lucier does not rate individual stocks and his firm has done no underwriting for Microsoft.

"Right now the trial news is purely speculative," Lucier said. "What's being floated in the

Washington Post

and in the

USA Today

looks suspiciously like the states' initial lawsuit."

The Wall Street Journal

also reported that federal prosecutors now favor splitting away the portion of the company that makes the Office suite of software products. That proposal, Lucier noted, would be hard pressed to meet the legal definition of a remedy, fixing a discernable problem. It would not address the operating system monopoly and its extension to the browser market, the fundamental antitrust violation pinpointed by Judge Jackson. Instead, it would take away a product that was a top profit source until the debut of Windows 2000.

That proposal was the nexus of a lawsuit that was tossed aside when state and federal claims were consolidated.

The leaks make it appear the states are driving the remedy proposal process, but "now that settlement talks are off, there is no reason for DOJ to offer a moderate position," Lucier said. "They're back to threatening a nuclear strike."