Investors ponder Microsoft's future


Those who bought Microsoft when it went public in 1986 likely are not worrying about a federal judge's ruling to split the software giant in two.

Microsoft has been good to them. A hundred shares bought at the company's IPO price of $21 a share would equal 14,000 shares today and would be worth $962,500, analysts estimate. It's enough to help more than a few Seattle fishermen upgrade to yachts.

But those who weren't lucky enough to get in before the Windows revolution - and they include both high-flying money managers and individual investors - are flush with uncertainty in the wake of U.S. District Judge Thomas Penfield Jackson's ruling Wednesday.

The judge ordered Microsoft split into two companies - one to develop and sell operating systems, such as Windows; and the other to handle Microsoft's Internet businesses and remaining software, such as spreadsheets and word processing.

If you own Microsoft today, what should you do? Say you want to invest only in the company Bill Gates is running. How do you know which one he'll run? Should you hold the stock through Microsoft's appeals, hoping it will prevail?

At this point, Microsoft analysts can only speculate. Despite such uncertainties, Frank Dworsky remains bullish. The downtown Baltimore branch manager for Prudential Securities is a longtime Microsoft shareholder, and his firm is predicting the value of the company's stock would shoot to $75 after a breakup. Microsoft's 52-week high was $119.9375, hit in December. Its shares finished regular session trading yesterday at $68.8125, down $1.6875.

Microsoft is part of a pantheon of technology companies - including Intel Corp. and Cisco Systems - that investors think of as blue-chip stocks. The new companies, Dworsky said, wouldn't be that different.

"You can't be risk-averse and be in technology today," he said.

If the breakup happens as ordered, Michael Schroeder predicts that conservative investors will flock to the operating system company while tech-savvy holders will stay with the software/Internet part. Schroeder, a partner in Wasmer, Schroeder & Co., a fixed-income money management firm in Naples, Fla., is also a Microsoft shareholder.

He said Wasmer, Schroeder is "just hanging on" until he sees Microsoft's breakup proposal. The judge gave the company four months, after it has exhausted all appeals, to devise its plan. In Schroeder's view, it isn't enough time, and the rush may cheat shareholders in the end.

"Look at any company that's done spinoffs. That gives you an indication that the pieces are worth more than the whole," he said.

Microsoft's talent base is another uncertainty. Schroeder predicts some investors will follow the company's top officials, notably chairman and co-founder Bill Gates and Chief Executive Officer Steve Ballmer, to whichever company they choose, figuring that's the money trail. Where will Gates and Ballmer go? Likely the higher growth Internet/software arm, Schroeder said. The operating system company's growth, he said, will resemble the steady pace of a utility or a pharmaceutical.

Beth Rosenwald is staying away from Microsoft, no matter where its founders go. Rosenwald, Legg Mason Wood Walker's associate vice president of investments, has traded the stock in the past. But uncertainties have kept her away in recent months.

"I hate watching it," she said of Microsoft, "because these are stocks you're supposed to count on, and you feel betrayed when they fall."

For her colleague, Legg Mason Chief Market Strategist Richard Cripps, watching the trial unfold was even more frustrating than the precipitous fall in the stock price.

"It's yesterday's war that they are fighting," said Cripps, referring to the operating system fight. Now that technology is moving to a Web-based standard, Windows will have a diminished role.

But Cripps said Microsoft's dissatisfaction with the outcome is no excuse for the company's bunker mentality. Instead of pouting about the injustices of government regulation, Microsoft needs to share with investors its restructuring plan, Cripps said.

"Nothing that I get in listening to Gates and Ballmer indicates they've in any way contemplated a future as two separate companies," he said.

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