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Microsoft share price rise is a puzzle

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For no agreed reason, Microsoft shares have increased in value by 14 per cent this week. There's an opinion from Michael Stanek of Lehman Brothers which noted that Microsoft is "somewhat immune from Y2K", and projects a price of 130 within 12 months. Bloomberg and Dow Jones cited "a favourable court ruling" which may be an optimistic way of describing the failure of the judge to give some reasons for decisions in Sun's action against Microsoft over Java. Bloomberg also mentioned as a reason the expected appointment of Richard Belluzzo to head Microsoft's Internet activities, but this was unrelated, according to Bill Epifanio of JP Morgan, who though the approach of Windows 2000 was more important. Steve Ballmer is on holiday and Gates is essentially out of operational matters, so the word from Microsoft is "no comment" about Belluzzo. Since he is tipped to start on 1 September, he is no doubt negotiating his contract details and reading the relevant Dummies book on the Internet, since his background is strongest in printer sales. The rise in Microsoft's share price will be bad news for head lawyer Bill Neukom, who sold 90,000 shares last week, just before the price rose. There has also been some curious activity in the Pacifc Exchange Microsoft options market, with many out-of-money calls being sold earlier in the week (essentially they are a bet that Microsoft's price will go higher). The proceeds from the sale of the calls was being spent on buying Microsoft stock, according to traders. The volatility index, which is seen a kind of fear gauge, was down 4 per cent at one point, according to a Microsoft trader. There are also mixed views as to whether there is an increased or decreased likelihood of a tracking stock to spin off Microsoft's Internet activities, to be known as the Consumer and Commerce group. Some were of the opinion that it would be a way to measure Belluzzo's performance, but whether Microsoft would be willing to entrust to him what could be around $50 billion of its $486 billion of assets is uncertain. Microsoft's Internet business showed revenue of $725 million in the FY which ended in June, but the losses are not disclosed. Another advantage of a tracker could be that it would provide a way to make expensive Internet acquisitions without diluting profits. Gates is believed to be against the tracker idea because of "implementation challenges" and CFO Greg Maffei thinks it would be expensive and complex to initiate. Of course, there could be trouble with other Microsoft staff if employees saw those with Internet options doing better - although this appears to be rather unlikely in the near future. Separately, AT&T may be considering creating a tracking stock since it scrapped a plan to create shares for its cable and wireless businesses. This could now have a tracker, with another for its long-distance services. AT&T's rationale is that investors have not valued AT&T shares sufficiently - they are down 20 per cent on their high last month. Of course, all this speculative analysis is based on an assumption that the markets are rational. ®

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