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Microsoft case could prompt employee departures

As the antitrust case against the software giant winds its way through the legal system, the company will have to guard against employee defections to keep its competitive edge, experts warn.

As the landmark antitrust case against Microsoft winds its way through the legal system, the software giant will have to guard against employee defections to keep its competitive edge, experts warn.

Microsoft faces two likely futures. One would involve breaking the business into an operating system company and an applications company. The other scenario involves continuing the legal battle with the Department of Justice at the appellate level.

Each option, however, creates looming uncertainties, which in turn could lead to defections among Microsoft employees, one of the company's most valuable assets.

"Microsoft is an intellectual property company; when people walk, that is part of the company leaving," said Jonathan Geurkink, an analyst at investment bank Ragen MacKenzie. "In my mind, being able to hire and retain really smart people is the biggest risk."

Then again, the company could see its recruiting tasks get easier. With its stock depressed from historical highs and the dot-com world facing uncertainties itself, Microsoft stock options are likely to gain currency with job seekers. Options in a new applications company also would hold the promise of a lucrative future. Agilent, a Hewlett-Packard spinoff, has soared on the stock market.

Until recently, Microsoft attracted some of the brightest talent in software development--people who saw an opportunity to work at a market leader while becoming rich through stock options. In recent months, though, the public perception of the company's fortunes has changed dramatically, and the stock price has sunk accordingly. The company is trading around $70, well below its high of nearly $120 in late December.

Analysts say the stock price undoubtedly is having a dour effect on employee morale. For years, Microsoft paid lower salaries than competitors but made up the difference in options. The stock slide may have eroded the perceived value of those options, however.

Microsoft already is concerned about the morale of its staff. Just last week, CEO Steve Ballmer announced in an email message that all employees would receive a slew of new benefits, including a one-time stock option grant to make up for the company's sagging stock.

A court-imposed penalty could make the options' apparent value sink further if employees believe a regulated or divided company wouldn't be as competitive as the old Microsoft.

"If the government gets exactly what it wants, the OS company will not be a particularly attractive place to work," said David Smith, an analyst at the Gartner Group.

Another analyst noted what happened to employee morale when IBM was facing its own antitrust battle in the late 1970s and early 1980s. The aggressive corporate culture at IBM was hobbled as everything had to be dissected by the legal department, Ragen MacKenzie's Geurkink said.

"If some of the proposed regulations Breaking the giant: Special Coverage are implemented for the (Microsoft) OS company, there is more incentive to create 'bloatware' than a good product," he said. "With all the scrutiny and new restrictions, you are tempering the creativity and enthusiasm."

Others believe a split would reenergize employees as new opportunities emerge.

"Microsoft is more in a protectionist mode right now, trying to hold onto its market share," said Jeff Christian, an executive recruiter at Christian & Timbers. "But if they are working for two companies with less synergy, they will be forced to think outside the box to innovate into new categories or start new businesses."

During the past year, the company has faced a growing employee exodus as some of its top talent has sought new opportunities. Just today, Nathan Myhrvold, Microsoft's chief technology officer for the past 14 years, said he would not return full time to the company after his leave of absence.

Others who have left the company include former Internet executive Pete Higgins; Brad Silverberg, former senior vice president for applications and the Internet client group; and Peter Neupert, former vice president of news and publishing in Microsoft's interactive media group.