On Friday, the Justice Department and several states asked a federal judge to divide Microsoft into two companies to prevent what it termed further abuse of its monopoly in computer operating systems.
Opinions were split on whether a breakup would damage Microsoft's long-term prospects. Some investors shrugged off concerns, believing that even if the company is split in two by a U.S. court, the resulting entities could be powerhouses in their own right. Still, the uncertainty of the case is likely to temper share prices in the long run, analysts cautioned.
The stock was up $3.69, or 5.29 percent, to $73.44 at the close of regular trading. The stock is well off its high of nearly $120 in late December.
The government proposed splitting Microsoft into an applications software company and an operating systems company. The split, if enacted, would result in "two companies that are very dominant and very well capitalized," said James Ragan, a senior analyst at investment bank Crowell Weedon. "I don't see (Microsoft) being at a disadvantage by being split up competitively."
Ragan sees the applications company as a sure bet to dominate in the industry due to the huge numbers of Microsoft Office users. The operating systems company, with Microsoft's various iterations of Windows, is likely to be a "vehicle that commands a lot of investor attention," Ragan said.
Others see Microsoft's hold on the desktop as nearly unshakable.
"The market is pretty much standardized on Windows for PC operating systems," said Jonathan Geurkink, an analyst at investment bank Ragen MacKenzie. "I don't know if Linux would be able to get any meaningful share of the desktop PC market--nor really could any of the other (operating systems)."
The mere notion of a Microsoft breakup was enough to breathe life into shares of firms selling the Linux operating system. Linux is seen as a viable competitor to Microsoft's Windows dominance, especially in the server market. This morning, Red Hat climbed $3.19, or nearly 13 percent, to $28.25, while VA Linux added $6, or nearly 15 percent, at $47.63.
Some analysts said a split might impair Microsoft's ability to compete.
"If ultimately approved, we believe the plaintiffs' remedies would seriously restrict the two Microsofts' ability to innovate and compete," wrote Christopher Mortenson, an analyst at investment bank Deutsche Banc Alex. Brown. This would "negatively impact shareholder value."
Geurkink said, "When Microsoft goes into enterprise licenses, it is often selling an integrated package of applications and platforms. If they aren't able to do that, it would limit some of their market power."
While Microsoft stock is likely to be buffeted by the uncertainty ahead in the continuing antitrust case, analysts note that looming operational troubles may be a larger concern.
Last week, Microsoft beat earnings expectations by posting earnings of 43 cents per share on sales of $5.65 billion for the third quarter, but the results were tempered by news that sales of corporate PCs were slow.
"With the business weakness that Microsoft is experiencing right now, it has added an element of fear that the market has run with," said Ragan.