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Hearing to kick off Microsoft suits

Lawyers for Microsoft and the government will attend a hearing Friday to discuss scheduling for the lawsuits filed against the software giant.

Lawyers for Microsoft and the government will attend a hearing Friday before U.S. District Judge Thomas Penfield Jackson to discuss scheduling for the two antitrust suits filed against the software giant.

The hearing in Washington marks the beginning of a long and arduous legal process to argue the historic lawsuits. The government accuses Microsoft of monopolistic business practices, while the software giant denies any wrongdoing.

On Wall Street, Microsoft stock held steady yesterday, but analysts cautioned that the software giant's looming protracted legal battle with the Justice Department is likely to have a negative "psychological" effect on the shares.

Microsoft stock gained 6 cents by 11:30 a.m. PT yesterday, up from Monday's close of 86.06.

While the stock lost nearly four points Monday after state and federal antitrust regulators filed lawsuits against the software giant, the shares have been retreating during the past month amid speculation that yesterday's antitrust lawsuits were imminent. The stock recently has traded as high as 99.13.

Donaldson, Lufkin & Jenrette yesterday initiated coverage on Microsoft with a "buy" rating. The firm also started coverage on rival browser software maker Netscape Communications, with a "market perform" rating.

Netscape stock has gained more than 70 percent since early April, climbing to as high as 28.88 during trading yesterday. It traded down around $16 a share early last month.

While the current legal situation should not have any effect on Microsoft's revenue or earnings estimates, it "does create a cloud of legal complexity which will continue to affect the stock price over the next few months," Mary McCaffrey, an analyst at BT Alex. Brown, said in a note to investors.

"Each piece of legal news or rumor will be analyzed in depth for potential effect on the fundamentals of the business," she added.

Other analysts agreed.

The current litigation by the DOJ, the states attorneys general, and Sun Microsystems is "likely to have a negative psychological impact on Microsoft?s shares," Furman Selz analyst Sanjiv Hingorani, said in a research report.

The increased litigation Microsoft faces, its decelerating earnings expectations, and the absence of any new major product cycle at the company for at least the next 6 months are likely to shrink its price to earnings (P/E) multiple, Hingorani said, noting that Furman Selz maintained its "hold" rating on the stock.

Microsoft shares are trading at P/E multiples of 48.9 times fiscal 1998 earnings, and 42 times fiscal 1999 earnings estimates of $1.76 and $2.05, respectively.

Despite the downturn, McCaffrey pointed to strong fundamental drivers in Microsoft's business. She noted that there is still a good demand outlook based on low PC hardware prices and possibly lower server hardware prices, and said she expects a major product cycle to emerge within six to nine months, which should deliver some upside for the Redmond, Washington, company.

Hingorani predicted that Microsoft?s earnings per share will grow 33.3 percent in fiscal 1998, and 16.5 percent in fiscal 1999.