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Get ready for a possible swoon in Microsoft's stock price. As analysts chew over the implications of the company's failed settlement talks with the government, they're predicting that investors aren't going to be happy when the market opens on Monday, Apr. 3. "This is a huge long-term negative for the company. It opens a Pandora's box, this giant, unquantifiable risk that will hang over their head for years," said Trusco Capital Management analyst Christian Koch on Apr. 2.
Did Microsoft overplay it's hand? In a teleconference with the media and investors on Saturday, Apr 1., Chairman William H. Gates and his executive team tried to argue that the company had no choice but to break off peace talks. Specifically, they insinuated that a few of the state attorneys general were pushing for structural remedies, while the Justice Dept. would have been willing to accept a more moderate conduct remedy. "There were divisions and extreme views on the other side that brought us to the point where mediation wasn't going to be successful," said Gates.
You can take that spin control with a grain of salt. While it's still unclear exactly why the talks fell apart, it is clear that the majority of the states were willing to accept restrictions on Microsoft's operating practices instead of a breakup. "It is hard for me to imagine that, if Microsoft and the DOJ and some of the states agreed on a package of conduct relief, that all of the states would not have gotten on board with it," says Stephen D. Houck, who served as lead lawyer for the 19 states suing the software giant during the Microsoft trial.
"ASTOUNDED."
Late last year, Houck left the New York Attorney General's office, where he served as antitrust chief, to join the New York City law firm of Reboul, MacMurray, Hewitt, Maynard & Kristol, but he has continued to follow to case closely. "If there had been conduct relief that had been satisfactory to a core group of prosecutors, I would have been astounded if everybody didn't come on board with that. If there were a few states that felt otherwise, as a practical matter I don't think it would have made any difference," Houck adds.
The real reason Microsoft didn't make a deal isn't because the states were asking for remedies that were too extreme. More likely, its executives probably believe that there's no way courts will break up such a successful company in any event. And they're probably right. That's why, in spite of investor nervousness, Microsoft is willing to keep fighting.
U.S. District Judge Thomas Penfield Jackson could now issue his final legal ruling on the case as soon as Monday, Apr. 3. Everyone involved expects it to a blistering indictment of Microsoft's business practices.
TAKE THE HEAT.
Jackson is then expected to hold a series of hearings on the potential remedy for the case. Look for the government team, after having had its offer of conduct remedies spurned, to once again seek a breakup. "Now that settlement talks have broken down, we are back to square one. I would be surprised if the government didn't ask for some form of structural relief," says Houck.
That's certain to shake up investors even more. But to get the best resolution possible, Gates & Co. is more than willing to absorb a little heat in the stock market.
France is Business Week's legal affairs editor EDITED BY DOUGLAS HARBRECHT
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