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Is MS heading for a share price meltdown?

Sooner or later, the juggling's surely going to fail...

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Just when Microsoft is being investigated by the SEC, a little forensic analysis of Microsoft's share price and of events over the last few days suggests the company could just possibly be trying to give a little upward nudge to its sluggish share price. The SEC is of course very sensitive to any attempt at manipulation of the market. But the recent heavy selling by insiders such as Bill Gates and Microsoft co-founder and board member Paul Allen is probably unrelated. Gates has sold 1.31 million shares for around $125 million (possibly for his foundation), with Allen selling 16 million shares for perhaps $1.5 billion (again, too much should not be read into this, as Allen regularly sells substantial numbers of Microsoft shares to finance his investment company). The daily average on NASDAQ for Microsoft shares is around 30 million, so although the over-the-counter parcels are large, they do not swamp the market. Of course it would not be a surprise to find that Microsoft was buying many of  the shares (making Gates indifferent to the price he obtains), but we shall have to await the next Microsoft financial report to see if this was the case. A recent SEC filing tells us that although the share sales by Allen and Gates were spread over eight days in February, there was no clash as to which days were used to sell their disposals, which strongly suggests some coordination. Momentum marketing A glance at Microsoft's history shows us that the company is a master at momentum marketing - suggesting that sales are going better than they are, in the hope of encouraging others to buy. One of the more amusing examples of this was last June when Microsoft's headline read "Windows CE devices outsell 3COM PalmPilot 3 to 1" and that these devices were "a big hit in Europe". It turned out that this was perhaps true for just for one retail store in Paris. The most infamous example was Microsoft's high claims for Windows 95 sales in Q3 of 1995, when Microsoft was keen to show that the product was a great success: testimony during the trial and other evidence adds support to suspicion about the accuracy of the claims. A third example was seen in the hyping of sales data for NT in the early days: these were often quoted as percentage increases, or combined with those of Windows 95 to create the impression that NT was doing well, when in fact sales were very slow indeed. Two recent Microsoft activities certainly look to be in the momentum marketing category, and designed to help Microsoft's share price, which is down around 30 per cent so far this year, notably languishing after the release of Windows 2000 and suggesting that Wall Street was not convinced that the product would be quickly successful. On Thursday, there was a private briefing to Microsoft's media chums and financial analysts in Redmond, with no press release and only a brief report carried by Reuters. The message from Keith White, director of Windows marketing, was that Windows 2000 sales were "significantly" higher than "our expectations" - he claimed that Windows 2000 retail sales were around half a million copies - but there was no information as to just what Microsoft had expected. A more interesting statistic would be the true figure for sales in March, to see if the initial sales were from "pent-up demand" and whether businesses are waiting for the first bug fix, which White said would be in four to six months - way past the end of Microsoft's financial year on 30 June. (White also stated that Windows Me was scheduled for the second half of this year.) The next day - last Friday - Microsoft's stock price went up $5 to $98.625 by noon, with very active trading. It began to look as though the briefing and apparent good news - which was not formally released to the stock exchange - was having the desired effect - but it was not enough: the afternoon saw $2 shed. Yesterday, another $5.50 was lost, with the close being at $90.625. Also on Friday WebSideStory, a Web audience analysis firm, just happened to announce that Windows 98 usage was at "an all-time high", which was no surprise at all since it is so difficult to buy a home PC without Windows 98 pre-loaded. Microsoft apparently sees its competitor as Windows 95. Although there are no obvious Microsoft footprints in the story, it would be surprising if Microsoft were not a significant customer of the firm. Then yesterday, Microsoft actually used the "momentum" word, saying in a release that there was "unprecedented momentum for MSDN", presumably to bolster the impression that developers are moving from similar Sun, IBM and Oracle developer programmes. The facts are of course that Microsoft developers must join MSDN to get key information, whereas this is less the case with the other vendors' programmes. The danger of meltdown Microsoft shareholders probably have two main concerns: they want a satisfactory outcome to the Microsoft trial,  and they are concerned that Windows 2000 quickly becomes a success. The consequences of bad news in either case for shareholders and staff (whose stock options would be become useless), are potentially very serious. The last 12 months has seen the Dow Jones industrial average rising just over 4 per cent while the NASDAQ composite index has doubled. In the same period, Microsoft's share price has gone up just 23 percent, and so is seriously underperforming in the high-tech market. Thoughts are increasingly turning to the question of whether there will be meltdown in the share price if Microsoft has a bad quarter. Many investors will certainly have an exit strategy in the form of a stop-loss sell order on their holdings, and once these begin to be triggered, a dramatic fall is a serious possibility. The evidence to hand suggests that any such fall would not greatly upset NASDAQ companies unless they had a high reliance on Microsoft. However, with Microsoft now being a component of the Dow, the chances are that the Dow would be dragged down to below levels of a year ago. In looking for a target for their wrath, it would be hardly surprising if the  financial analysts did not decide that the clay pigeon was Microsoft, and dumped their Microsoft holdings. ®

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