Microsoft shares gain ground

Yeah Baby! Gates finds the government wants to steal his mojo

Microsoft shares gained 5.5% on Monday, as investors had their first chance to react to detailed government proposals to break up the company.

Government proposals

Split Microsoft in two

'Baby Bill 1' sells Windows

'Baby Bill 2' sells applications like Word, Excel, Internet Explorer

Firms barred from working together

Baby Bills cannot reunite for 10 years

Ban on exclusive or tie-in deals

Both Baby Bills must support and licence former Microsoft products

The plunge predicted by some did not materialise. Analysts said the market had already priced in the government's proposed "remedies", following a court judgement that found Microsoft guilty of breaking US anti-trust law.

During the past four months Microsoft's share price has suffered a steady decline, losing about 45% since peaking at just under $120 in early January this year.

The US Department of Justice wants to see Microsoft split into two companies. One is to develop the Windows operating system, which is at the core of close to 90% of the world's personal computers. The other 'Baby Bill' would sell applications software and run Microsoft's internet businesses.

Strong buy

Traders are no longer shouting "Microsoft sell, sell, sell"

When the markets closed on Friday, one Microsoft share was worth $69.75, down 15% on the week - losses triggered by extensive media leaks detailing the government's break-up proposals.

Analysts insisted that Microsoft shares were still a good buy - regardless of whether the firm was broken up or not.

Michael Stanek of Lehman Brothers gave a target value for Microsoft shares of between $125 and $135, based on the sum of the company's parts: "Investor objections of not owing the stock based on 'breakup' fears are no longer rooted in reality."

The dismantling of Microsoft ... would send a signal that companies in America that are 'too' successful will be punished harshly.

Microsoft statement

ING Barings analyst George Godfrey gave a similar target price, saying the government's "reckless" proposal was unlikely to be carried out.

"Shareholders should win no matter what the outcome and ... Microsoft stands a better than 50/50 chance of winning on appeal," Mr Godfrey added.

Microsoft itself can do little to prop up its own stock. Following its takeover of software maker Visio in January, Microsoft is barred from buying up its own stock to drive up the share price.

The restriction ends on 7 June, after which the stock could quickly recover.

Drawn-out process

Microsoft now has 10 days to prepare its response to the government's proposal, and a hearing is not expected before the end of the month.

What happens next?

10 May: Microsoft will give its response

17 May: The government files its rebuttal

24 May: Judge holds remedies hearing

Dates could change if Microsoft gets more time to prepare

However, any decision by Judge Thomas Penfield Jackson is unlikely to affect Microsoft or the firm's customers any time soon.

Microsoft officials have described the government's plan as "extreme" and "unwarranted" and say they will appeal.

Assistant Attorney General Joel Klein, the man driving the government's case against Microsoft, believes that the appeals process will take at least one year.

A changed market

In Silicon Valley, industry experts noted that the market situation had changed dramatically since the anti-trust case was launched in 1997.

Klein: Confident Microsoft will be split

They argue that operating systems and browsers will not be at the heart of the industry for much longer. Software to run handheld devices and interactive set-top boxes for television sets will soon be at the centre of attention, and Microsoft is not particularly strong in either sector.

Rob Enderle of the Giga Information Group consultancy said: "Given the way the market has changed, I don't believe it is any longer necessary to break up Microsoft."

He warned that the uncertainty surrounding the future of Microsoft could hamper innovation and lead to higher prices for consumers in the mean time.