| BUSINESSWEEK ONLINE : MAY 17, 1999 ISSUE | ||||||||
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| COVER STORY
Why Microsoft Shareholders Should Cheer the AT&T Deal Through set-top boxes, Microsoft will enter millions more homes -- and find new ways to make money Microsoft MSFT is never far from the headlines, but for much of the past year the software giant has been lying low. While it has made numerous small investments and acquisitions, it has been absent from the high-profile technology megadeal scene. Meantime, America Online has snapped up Netscape NSCP and partnered with Sun Microsystems SUNW, USA Neworks has negotiated to buy Lycos LCOS, and Yahoo YHOO has moved to buy Broadcast.com BCST. Microsoft's Web sites have been climbing in traffic, but they hardly command the presence of the likes of Amazon.com AMZN or Yahoo! (YHOO). Even upstart Linux, the open-source operating system, has been able to make inroads against mighty Windows NT this year. To some observers, Microsoft seemed to be sitting on its $22 billion cash horde waiting for the right opportunities while the Internet Age was passing it by. Some analysts believe the company's ongoing antitrust trial has not only taken up more time and energy than top execs are letting on but has also softened the company's well-honed killer instinct. "The combination of the trial with certain fundamental aspects of the Internet -- it's hard to be a big fish in a pond the size of the ocean -- has basically caused Microsoft to recede into the background," says John Robb, an industry analyst and president of Gomez Advisers. "They started to get gun shy." Now, though, change is clearly afoot. Microsoft is engaged in a sweeping overhaul of its corporate structure to focus on developing software for a range of information appliances beyond the PC. It is reportedly considering creating a separate "tracking" stock for its Internet properties that could allow it to cash in on the Internet stock boom while insulating MSFT shares from volatility in that sector. And on May 6, Microsoft announced that it will invest $5 billion in AT&T T in exchange for a nonexclusive deal to supply software for cable-TV set-top boxes. "Our agreement today represents an important step in Microsoft's vision of making the Web lifestyle a reality," Microsoft Chairman and CEO Bill Gates said in a statement. CHANGE ON A DIME. An important step is right. For investors in the $414 billion market-cap company, seeing Microsoft at the center of such an important deal is welcome news. Through set-top boxes, Microsoft software will enter millions more homes, and from there the company can add other Internet services and find new ways to make money, analysts say. The deal also shows that Microsoft is making good on its promise to adapt to a market where desktop PCs and operating systems are less important than networks and information appliances, says Trent Nevills, an analyst with Federated Investors. "It shows the power of Microsoft to be able to spend cash and change on a dime." Analysts believe this deal may be the first of more announcements to come. "They have a lot more money to spend," says Robb. "I don't know if this is the pivotal event," adds Nevills, pointing out that the timing on the current deal was triggered by AT&T's move to buy MediaOne Group. "But as the antitrust trial winds down, [Microsoft] will be free to really pursue its Internet strategy." An increase in dealmaking activity and other important announcements could act as a catalyst to Microsoft's already expensive stock. The stock has averaged an annual gain of nearly 70% for the past five years, and in the past six months alone notched an additional 50%. But since its Apr. 6 high of 95 5/8 it has fallen about 18%. Microsoft opened higher on May 6 on news of the AT&T deal, but it closed down 1 3/15 points at 77 15/16, as interest rate worries brought down tech stocks. WORDS OF CAUTION. Microsoft's month-long decline is due partly to a general shift in the market away from technology stocks with high price-earnings ratios in favor of less expensive capital-goods makers and consumer cyclicals. (Microsoft's p-e is 62 compared with an average of 24 for the S&P 500.) The decline was also caused by looming concerns over slowing PC demand. In its fiscal third-quarter earnings announcement, Microsoft expressed caution about growth in 1999 since companies are expected to lock down their computer systems in preparation for the Year 2000 date change. While Microsoft often uses cautionary language in discussing growth prospects, Prudential Securities analyst Douglas J. Crook downgraded the stock to hold from accumulate and lowered his fourth-quarter earnings estimate following the company's Apr. 20 earnings announcement. "Overall, we continue to believe Microsoft possesses a franchise with unprecedented market strength. However, we don't see any near-term catalysts to the stock from these levels," he wrote in an Apr. 21 research note. Deals such as the new one with AT&T could potentially provide those catalysts. At the same time, other analysts are looking to the recent introduction of an updated Microsoft Office and the coming Windows 2000 operating system to provide earnings growth. For example, Microsoft gets about $45 for every copy of Windows 98 installed in a new PC, says Brian Goodstadt, an analyst with Standard & Poor's equity research group, who rates Microsoft a buy. But for Windows 2000, he expects it to get more like $85 a copy. That means Microsoft revenues can grow even if PC prices fall or if fewer units are sold. "Long-term, they can't just rely on PC software," says Goodstadt. "They need to aggressively move into new areas, and I think they'll continue to focus on that." In that light, the deal with AT&T could be a sign of things to come. By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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 Remaking Microsoft COVER IMAGE: Remaking Microsoft TABLE: Building Microsoft 2.0 ``I'm Trying to Let Other People Dive in before I Do'' RESUME: Steven Anthony Ballmer The Five Facets of Bill Gates's Tech Vision Q&A with the Visionary-In-Chief ONLINE ORIGINAL: Why Microsoft Shareholders Should Cheer the AT&T Deal INTERACT E-Mail to Business Week Online | |||
