While the potential breakup of Microsoft Corp. into two or more separate companies would be painful for the software giant, it wouldn't scare away institutional investors.
Not that they believe a breakup would be in the best interests of the company or its shareholders. Far from it. Large institutional owners of Microsoft stock tend to view the potential breakup as draconian and unwarranted.
Still, what was once unthinkable might now be possible. Officials reportedly are eyeing carving the company up several ways.
Current holders of Microsoft believe a breakup would result in up to three smaller growth companies.
Although Microsoft has been a mainstay in most large-cap growth portfolios for several years, some investors have lightened up their holdings in the past few months because of the uncertainty surrounding a possible breakup.
Microsoft stock has skidded about 41% thus far this year, from $117.62 at the end of 1999 to a recent price of about $68.50. The stock hit a 12-month low April 24, declining more than $12 following news that the government might be considering a breakup.
Institutional investors weren't overly enthusiastic about the prospects for a post-Microsoft group of companies, but none ruled out owning the Microsoft component companies in their portfolios.
"The parts would be worth more than the sum of the parts," said Alan Loewenstein, co-portfolio manager of the John Hancock Technology Fund in New York. "The Internet component has not recognized its full potential. Basically, you will still be getting growth in all areas, although their systems business growth has been slower than anticipated."
Mr. Loewenstein's $2.5 billion fund owns about 500,000 shares of Microsoft. Hancock officials said they're comfortable with the holdings at the current levels.
Mr. Loewenstein said he likely would be a buyer of each separate Microsoft component company if a breakup takes place.
For some institutional investors, the changing face of the software market -- from applications-based programs to Internet-based programs -- causes more concern for Microsoft than a possible breakup.
It's probably a safe assumption that current Microsoft shareholders will be interested in owning shares in any new companies resulting from a breakup of the company, said Jay Nakahara, portfolio manager for the $835 million INVESCO GT Technology Fund, New York. "We are not overweighted in Microsoft today -- not so much because we fear a breakup, but mostly because of the volatility in the market created by uncertainty" over the direction of the software market.
The INVESCO fund holds about 3 million shares of Microsoft.
"If the company were split into one containing Windows and Office applications and another with the Internet operations, it wouldn't change the dynamics of how they operate. It wouldn't be like two startup companies coming into the market," Mr. Nakahara said.
Mr. Nakahara is concerned about Microsoft's market performance during the past 18 months, when it has lagged "considerably."
"It's not unfairly valued in the high-60s," he said. "But we have been underweighted in the stock for some time now. The first quarter was touchy with the introduction of the first new operating system in several years (Windows 2000) creating some disruption. Add to that the market volatility (in tech stocks) and the legal battles make it hard to overweight."
Mr. Nakahara said should Microsoft be split into two companies, he would seriously consider investing in the new businesses.
Not everyone believes a breakup is inevitable.
"We don't expect the company to be broken up," said Henry Cavanna, managing director and senior portfolio manager at J.P. Morgan Investment Management Co., New York. "It would be dangerous for the government to start getting involved in things like this."
But if the government's actions result in splitting the company into two, "we would view that as a slight negative," he said.
Mr. Cavanna said Microsoft today, or as two separate companies, is "severely undervalued."
"If you look at the operating division, Windows 2000 is going to be a home run. It's a very strong product, and that product can drive the growth of the company. The future of the operating company independently is very sound," he said.
"The challenge is more on the applications side. Industry growth is coming not from desktops but in Internet- and web-based applications, areas where Microsoft is not dominant but they will be, either together or independently," said Mr. Cavanna.
"The applications systems would be the weakest link if it were on its own."
He said, J.P. Morgan has been adding to its Microsoft holdings in recent months to an overweighting relative to the Standard & Poor's 500, making Microsoft one of its largest holdings.
According to Thomson Financial Securities Data, Newark, N.J., J.P. Morgan held 28 million shares at year-end 1999.
George Gilbert, senior vice president and co-portfolio manager of the Northern Technology Fund at The Northern Trust Co., Chicago, said he would consider purchasing shares in a divided Microsoft "at the right price."
Northern owns close to 30 million shares. It has taken a neutral stance on Microsoft since the fourth quarter of last year -- largely because of the migration toward Internet applications and web devices, not Microsoft's strongest suit.
"I've been positive on Microsoft for 10 years continuously but turned neutral given concerns about slower growth." he said.
As with most institutional holders of Microsoft, Mr. Gilbert is adamantly against breaking up the company.
"I'm hard pressed to see how you can get more value by having separate companies," he said.