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Analysts back Microsoft
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May 11, 2000: 6:56 p.m. ET
Analysts doubt software giant will be split; company seen winning on appeal
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NEW YORK (CNNfn) - One day after Microsoft Corp. proposed restrictions on its own business practices in its landmark antitrust trial, a raft of securities analysts issued reports siding with the software maker and predicting that Microsoft will score a victory over the government if the case is appealed to a higher court.
Several analysts issued research reports saying that the government's proposal to divide Microsoft (MSFT: Research, Estimates) into two companies is unreasonable and unlikely to become reality. However, they also predicted that Microsoft would lose in proceedings before Judge Thomas Penfield Jackson, given the harsh stance Judge Jackson has taken against the software giant so far in the antitrust trial.
The analysts' support for Microsoft is not surprising. Securities analysts face pressure to make positive comments about companies because their employers make money underwriting and trading those companies' securities and because "sell" recommendations often anger a firm's clients who hold the stock.
In fact, CIBC World Markets' Melissa Eisenstat is one of the only sell-side analysts who doesn't have a "buy" or "accumulate" recommendation on Microsoft's stock, which has declined about 42 percent so far this year. On April 3, when settlement talks between Microsoft and the government collapsed and the company's stock closed at $90.87, Eisenstat downgraded Microsoft to "hold" from "buy" and said that "a 50 percent correction in the share price is possible."
In a set of six documents filed with the U.S. District Court Wednesday, Microsoft asked Judge Jackson to reject the government's proposed breakup of the company, calling such a move an "extreme remedy not even hinted at in the government's complaint."
Instead, the company proposed a series of changes to its business practices that would give personal computer makers the ability to hide access to Microsoft's Web browser, as well as more leeway to configure the Windows desktop and the start-up sequence computer users see when they turn on their machines.
Wall Street analysts weigh in
Donaldson Lufkin & Jenrette analyst Joseph Farley repeated his "buy" rating on Microsoft stock Thursday, with a 12-month price target of $140.
"We continue to believe these shares offer an attractive investment opportunity and reiterate our "buy" rating," Farley said in a research note.
"Microsoft's response is not at all unexpected," Farley said. "We continue to believe that a breakup of this company is arbitrary, given the increasingly blurred line between application and operating systems. We believe that the company should win on appeal."
W. Christopher Mortenson at Deutsche Banc Alex. Brown reiterated his "buy" rating on Microsoft's stock, and said that the company's proposed remedies "address the court's findings of law and could largely be enforced by the marketplace while allowing Microsoft to continue to innovate and compete." However, Mortenson also said that Microsoft is likely to lose when Jackson adopts a remedy.
"We continue to expect that Microsoft will not win the case in Judge Jackson's court, but would win on appeal," Mortenson said in a research note issued to clients.
Goldman, Sachs & Co.'s Rick Sherlund, considered to be the most influential Microsoft analyst, issued a research report Thursday that makes no change to his estimates for the company's earnings or his "market outperformer" rating on the stock. Sherlund said that he will look to a hearing in Jackson's court scheduled for May 24 for an indication of what Jackson's views are on the proposed remedies and the future direction of the case. He also opposed the government's proposal to divide the company in two.
"Microsoft cannot easily be broken up," Sherlund said in his note to clients. "It is a unitary company with one management team, one headquarters, one set of sales and marketing offices, one sales force, one product support organization, one basic research unit, etc."
Rich Scocozza, an analyst at Bear Stearns, issued a report Thursday saying that "the proposal for a break-up will not be sustained by Judge Jackson and would clearly not survive a review on appeal."
"We urge investors to focus on the strong Windows 2000 upgrade cycle that can provide a top-line catalyst for 18 months or more and continued innovation from Microsoft in wireless and Internet products and services," Scocozza's research note said.
Not surprisingly, both the federal government and the states suing Microsoft weren't impressed by the company's proposed remedies. Iowa Attorney General Tom Miller, who leads a working group of the states, issued a statement calling the proposed restrictions "inadequate."
"These measures would not have prevented the serious violations of law found by Judge Jackson, and they are not adequate remedies to assure that the law is not broken in the future," Miller's statement said. "The states also believe this case should continue to move steadily ahead to a conclusion and not be derailed or dragged out by Microsoft."
The Justice Department issued a similar statement, saying that Microsoft's proposal "fundamentally fails to repair the damage to competition caused by Microsoft's illegal acts, or to prevent Microsoft from committing similar violations in the future."
According to a Gallup poll released Wednesday, most Americans oppose splitting Microsoft into two companies. The Gallup Organization said that although 49 percent of those polled believe Microsoft is a monopoly, 54 percent oppose a breakup, while only 34 percent are in favor of the plan, and 12 percent had no opinion.
The company's stock closed Thursday at 67-7/8, up 1-11/16. 
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