Microsoft Corp. shares rose 5.3 percent as some analysts said a breakup of the world's largest software maker would be good for investors, giving them stakes in two formidable companies.
Shares rose 3 11/16 to 73 7/16 in Nasdaq Stock Market trading. They had fallen 37 percent this year on concern about the government's antitrust case against the Redmond, Washington-based company, and slowing sales growth. Microsoft would be split into two companies under a proposed antitrust remedy submitted Friday by the U.S. Justice Department. One company would sell the Windows operating system and another would handle software applications such as Office. Some analysts said a breakup could benefit at least the applications half of the business, allowing it to develop and sell products for competing operating systems such as Linux.
"Our valuation shows that, whether split up or not, the sum of the parts are worth about $125 to $135 a share,'' Lehman Brothers Inc. analyst Michael Stanek said in a report to clients. "Therefore, investor fears of owning the stock based on break up fears are no longer rooted in reality.'' Some analysts, however, argue that splitting up Microsoft would leave two companies, neither of which would have the research capability, cross-marketing and ability to subsidise its products that Microsoft as a whole currently has.
"This would not be a positive for Microsoft, shareholders or consumers,'' Merrill Lynch & Co. analyst Chris Shilakes said. Regardless, any final decision is likely years away. U.S. District Judge Thomas Penfield Jackson has yet to issue his remedies in the case, and Microsoft has vowed to appeal the ruling, insuring it will be in the appeals process for several years.
The Justice Department made its recommendation in filings with the U.S. District Court overseeing the antitrust case. Judge Jackson, who ruled April 3 that Microsoft had illegally protected its Windows monopoly, hasn't yet issued his remedies order. "The government has played their cards,'' which takes away the uncertainty that had been worrying investors, said Philip Orlando, chief investment officer with Value Line Asset Management, who has about 200,000 Microsoft shares in his $1 billion portfolio. "We'd all be pretty happy,'' if Microsoft ultimately is broken up along the lines the Justice Department is seeking.''
Shares of Microsoft's rivals in operating system software gained on prospects that their revenue and market shares would increase. Red Hat Inc., which sells Linux software, rose 2 13/16, or 11 percent, to 27 7/8. VA Linux Systems Inc. rose 18 7/16, or 44 percent, to 60 1/16.
The likelihood of years of appeals has led some analysts to say that any investment decision based on expectations the company will be split up is premature. "It would likely be years until such a remedy, if ultimately decided upon, would be implemented,'' said CIBC World Markets Inc. analyst Melissa Eisenstat, who has a "buy'' rating on the stock. Nonetheless, Microsoft shares could lag those of its competitors and the broader market, as the lawsuit winds its way through the appeals process, analysts said. A CIBC analysis of Microsoft as two companies valued the sum of the parts at $52 to $134 a share, with the higher value reached by comparing Microsoft's stock price-to-earnings ratio with those of its rivals. The lower values came from comparing the company's market capitalisation to its revenue. Reuters
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