Will Microsoft’s Stock Troubles Disrupt Your Enterprise?

Judge Thomas Penfield Jackson slammed his gavel down on Microsoft Corp. Friday, March 31, after U.S. financial markets closed. Seems he was worried about the effect his ruling might have on the stock market. With good reason.

As a poster child for the high-tech industry, Microsoft’s stock performance isn’t just important to those who own it. MSFT serves as a bellwether for an entire market segment. When times are good for Microsoft, other tech stocks often experience a halo effect. When times are bad …

Times are bad now. Microsoft’s stock had been fluctuating, apparently in part over rumors the company was close to a deal with the Department of Justice to resolve the antitrust case. Investors who wanted to see Microsoft move on, bought in when Microsoft appeared ready to deal.

That the judge pasted Microsoft in his Findings of Law came as no surprise to anyone who even skimmed his Findings of Fact months earlier. While the judge’s anti-Microsoft ruling was a foregone conclusion, investors reacted badly to the fact that the judge ruled at all. Microsoft was damaged by its failure to settle under the guidance of a court appointed mediator.

The bad news for Microsoft kept coming. Jackson’s moves to accelerate the penalty phase and fast-track the case to the Supreme Court could cause trouble for a Microsoft legal team that seemed to be focused on dragging the case out on appeal. The company faces a jaw-dropping estimate of 110 class-action suits, and Sun Microsystems Inc. was considering a lawsuit. Microsoft also suffered a PR backlash when a lobbying arrangement with former Christian Coalition figurehead and current Bush campaign advisor Ralph Reed came to light and had to be terminated. The arrangement fueled speculation that the Gates team is hoping a Republican administration might rein in the anti-trust effort against Redmond.

Chairman and chief software architect Bill Gates took to the airwaves in a TV commercial to do his best to convince the populace that Microsoft will continue to innovate.

Microsoft stock sank like a stone. From a $106 per share close before the ruling on March 31, the stock fell to around $90 in early April, rallied slightly, then fell and fell. In mid-April, MSFT closed below $80 for the first time since June 15, 1999, then pitched below its 52-week low of $75.50.

An already retreating Nasdaq took its cue from MSFT and posted a series of sharp declines. The Nasdaq composite index fell 349.15 points April 3, 286.27 points April 12, and 356.74 points April 14. Those three numbers are the index’s largest single-day slides ever. By April 14, the Nasdaq had fallen 34 percent from its March 10 record of 5,048.62. To be sure, a lot of factors were involved, not the least of which were inflation fears, margin calls, and a general sense that tech stocks have been wildly overvalued.

Unless you personally invested money in MSFT at its late 1999 high near $120, you may be wondering how all this stock talk affects you. The answer is that if you’re reading this magazine, chances are you’re invested in Microsoft technologies, and the two are intertwined.

The questions proliferate: How do Microsoft’s ongoing legal battles and stock distractions affect the company’s ability to deliver the enterprise technologies it has promised? How will the ruling affect Microsoft’s ability to support its existing enterprise technologies? How should the ruling influence your Windows 2000 deployment planning?

It’s definitely too soon to tell, but there is already speculation that Microsoft is slipping on its planned May announcement of its Next Generation Windows Services initiatives because of its legal difficulties. With the current set of facts, such speculation is ridiculously premature.

NGWS represents one of the largest problems for Microsoft yet. Even before the judge’s ruling sent MSFT into a tailspin, Cisco Systems Inc. supplanted Microsoft for the first time as the company with the largest market capitalization. The late March development even made the front page of USA Today and was widely heralded as evidence the PC era is fading as networking companies’ fortunes rise.

Microsoft faces a situation with the coming broadband networks and what Microsoft itself calls Internet megaservices where even a monopoly on the desktop can’t help it compete, except in terms of the cash it can mobilize. Defining its strategy in this critical but unfamiliar territory represents an extremely difficult task for Microsoft.

Microsoft’s history is filled with instances where the company has promised more than it was actually ready to deliver – perhaps to freeze its competition, perhaps to motivate itself to Herculean action.

A more credible concern may be the ability of Microsoft to attract and retain talented employees if the stock founders. It’s no secret stock options have been a key motivator in Redmond.

In any event, we’ll be watching Microsoft closely to see how they handle these issues in the coming months.

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