With all hopes for a settlement of the antitrust case against it dashed, software giant Microsoft (Nasdaq: MSFT) is bracing for harsh sanctions and a possible breakup of the company when federal judge Thomas Penfield Jackson issues his ruling sometime this week.
The chief mediator in the case, U.S. Court of Appeals Judge Richard Posner, announced Saturday that all efforts to settle have failed. Posner issued a one page explanation that characterized the differences between the opposing camps as “too deep seated to be bridged.”
Jackson previously found that Microsoft abused monopoly power over its Windows operating system, thereby discouraging competition and damaging consumers. If the judge does rule against Microsoft, it is likely that hearings will be held to determine how to remedy the situation.
Penalties could range from a massive breakup of the company to a more modified corporate restructuring. Many insiders estimate that the determination of remedies could take up to six months, after which time Microsoft has the right to appeal. Appeals, depending upon the complexity, could take years.
Microsoft Plays Hardball
On Saturday, Microsoft Chairman Bill Gates said the current stalemate occurred because “the Department of Justice and the states were not working together. Between them they appeared to be demanding either a breakup of our company or other extreme concessions.”
While details of Microsoft’s own settlement proposal have not been made public, Gates has been adamant about his objection to a breakup of the company.
After Gates blamed the Department of Justice (DOJ) and the states for the deadlock, Connecticut Attorney General Richard Blumenthal countered, “The differences between the states and the Department of Justice are minimal when compared to the divergence between our side and Microsoft.”
Gates has stood his ground despite advice from his own attorneys, three of whom helped craft a friend-of-the-court brief in the company’s defense. C. Boyden Gray, Howard Trienens and Nicholas Katzenbach all said prior to the collapse of the talks that Microsoft should settle the case rather than accept a courtroom verdict.
Regardless of who is at fault in the settlement talk debacle, Microsoft is bracing itself for the worst from the court. “We anticipate we’re not going to get some good news on the conclusions of law,” said Bill Neukom, Microsoft’s senior vice president for law and corporate affairs. “But we are comfortable with our prospects on appeal. This case is a long-standing play, and we are just in the middle of it.”
While trial observers fully expect Jackson to rule against Microsoft, what remains in doubt is the severity of the remedies he will issue. If Jackson rules the company blatantly violated antitrust laws, a “structural remedy” could be ordered, meaning the company may have to reorganize to create competition in the marketplace.
However, if the government decides upon a “conduct” remedy, Microsoft would be ordered to stop engaging in certain business practices. Ideally, a structural remedy would render further violations of the antitrust law impossible. A conduct ruling requires constant oversight to see that Microsoft stays in compliance with the ruling. Both sides reportedly would prefer some type of structural remedy, rather than a conduct ruling.
Microsoft’s share price dropped 12 percent to 94 9/16 in early trading Monday, and some analysts are predicting further fallout.
Comparing the case to the “tobacco situation,” Goldman Sachs analyst Rick Sherlund said he expects the stock to fall sharply today, and possibly to continue to fall in the long term.
After a gain last month on hopes of a settlement, the latest drop could be the harbinger of a barren season for Microsoft shares. In addition to the antitrust suit, Microsoft is facing some 110 separate class action lawsuits. With the likelihood of an appeal in the antitrust case dragging on for years, the legal cloud over Microsoft’s head could darken its future for many moons to come.