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Wall Street's finest lose plot in support of DoJ case

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MS on Trial The last of the DoJ's supporting Declarations to trickle out are rickety edifices, to say the least. The Declaration by Ernest Von Simson is arguably the most pathetic document that the DoJ has filed so far in its case against Microsoft. Poor grammar apart, there's around two pages of CV and two pages of unsupported and unreasoned opinions about how large enterprises might be affected by the structural separation and conduct remedies. No wonder the DoJ was slow to post it on its web site. The Declaration by Robert Greenhill and Jeffrey Williams of Greenhill & Co is almost as extraordinary, but in a different way. This time, almost a quarter consists of CV information. The remainder - which is supposed to be an "opinion from a corporate, financial and capital markets perspective on the feasibility of the proposed separation and the potential intermediate to longer-term impact on the Company and its shareholders" - is not that at all, for the main part. Instead, it dwells on the structure of Microsoft, but omits the recent reorganisation which the authors apparently haven't noticed. Then there's some elementary text book stuff that reads like a simple recipe on how to separate a company into two parts, but everything said is extremely obvious. This is not the kind of expertise that might be expected of a former president of Morgan Stanley and chairman of Smith Barney (Greenhill), and a managing director at Morgan Stanley (Williams). The authors' opinion that forming OS and apps companies "is feasible from a corporate and capital markets perspective" does not derive from the preceding text. There is a claim that the authors had "performed a sum-of-the-parts analysis assuming a range of assumptions and believe our estimates and adjustments to be based on reasonable and rational business judgments based on the currently available public information" but the data are not given to support the claim. Equally unsupported is the claim that "Much of the potential civil litigation liability is built into the existing Microsoft stock price". It is most unlikely that Microsoft's share price reflects the future consequences of the class-action suits (or a potential shareholder suit, for which there is prima facie evidence). Nor has allowance yet been made for how Microsoft's profits would be reduced by its future inability to command monopoly profits. Of course there are divergent views, but quite simply the market has not yet come to terms with the consequences. Financial analysts differ widely in their opinions as to the value of Microsoft's shares. David Readerman of Thomas Weisel has lowered his estimate to $50 to $55 for the worst case (they are currently around $70), while George Godfrey of ING Barings suggested a value of $135, rated the shares as a strong buy, and described the DoJ proposal as "radical and reckless". Rick Sherlund of Goldman Sachs, Microsoft's greatest bull, thinks Judge Jackson will reject the DoJ's proposal. Lehman's Michael Stanek put the sum of the parts at $125 to $135. It is also curious that more attention seems to be directed at not harming Microsoft than to the concerns of the victims who have suffered as a result of Microsoft's illegal anticompetitive actions over the years: the users of Microsoft software, and Microsoft's competitors. In all the DoJ documentation, there seems to be considerable concern that shareholders should not suffer as a consequence of Microsoft's law breaking. But for more than ten years, the company has been under continuous investigation by the FTC or the Department of Justice, so no shareholder could reasonably expect their interest to be paramount in moves to restore competition to the marketplace. Microsoft's million or so US-resident shareholders have just started receiving a pre-emptive strike letter from Bill Gates asking them to complain to government officials about the DoJ case. It is ironic that just when Microsoft would like to buy back its own shares, it cannot do so because its acquisition of Visio excludes this possibility until the next accounting period on 30 June. This strongly suggests that Microsoft did not expect its shares to sink so low, or that it would have to double the last share options to keep its troops happy.

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