FALSE ALARM FROM JESSE

Last Monday, ZDNET's Jesse Berst quoted me in a “Berst Alert” entitled “The Coming Crash in Microsoft Stock,” painting a grim scenario in which new regulations from the Financial Accounting Standards Board, governing the reporting of employee stock options, could cause a nosedive in the MS share price.
     Here's my take on this story.:
     The FASB is indeed trying to get options expensed on financial statements. Although I’ve written before about the damage this could cause Microsoft, I am not qualified to discuss whether these new regulations will make their way into final form. But I am quite comfortable saying that, regardless of the details, they will have almost no effect on investors.
     The real danger is not that the new regulations will affect Microsoft, but that public perception of MS is so far out on this issue compared to other companies that it will not be perceived as belonging to the same landscape. In other words, the company could be “tainted” by this issue so that while the sector might avoid a hit, MS might not.
     This is not unlike the company’s liability from using temps as though they are real employees (a case it has already lost), with concomitant stock options due plus IRS payments and penalties, perhaps, due. But the options-expense item is Godzilla in the Garden.
     Berst also quoted SNS on another long-discussed MS accounting issue, smoothing earnings, and questioned whether a requirement to restate would affect investor confidence.
     While these represent true legal and accounting vulnerabilities to Microsoft, the company’s future is so strong that the long-term picture remains strong. MS is not going into the tank but into a new season of success.

THE THREE-STEP RUMBA

That new season includes a near-total control over tech standards in European cable. I’ve been writing for a few months about Microsoft’s interest in gaining access to the Deutsche Telekom cable assets. A day after I described United Pan-European Cable as a vehicle for Microsoft’s cable-buying interests in Strategic News Service, UPC made a blanket bid for every one of DT’s regional cable companies.
     UPC is not alone in this approach: Mannesman also is trying for a whole-country bid. DT is mounting a divide-and-conquer approach to being forced to privatize, in which it retains a 25 percent blocking vote on all of the spin outs while trying to sell them to disparate interests to avoid facing serious, consolidated competition.
     If we look more closely at how Europe is dealing with monopoly divestiture issues, the picture gets a little brighter. Last week France Telecom announced a new joint venture with Suez Lyonnaise des Eaux, in which they will pool all cable assets before an initial public offering (IPO).
     France Telecom’s main problem is that it carried cable assets at a hugely inflated value, and Suez wasn’t dumb enough to want to pay those prices. Resolution: a three-step rumba.
       Create the joint venture, giving Suez 50.1 percent with zero cash outlay.
       Bring in a third partner for cash, selling at least 20 percent and up to 34 percent of the joint venture.
       IPO.
     Guess who the two named possible third partners are? British cable major NTL — and UPC.
     Guess who owns the largest minority share in NTL? France Telecom.
     And guess who owns the next-largest share? Microsoft.
     Don't you just love this game? It makes Monopoly look like child’s play.

ONLINE TRADING’S NEW DYNAMIC

One of the more interesting aspects of the huge surge in online trading in the past couple of years has been the transformation of old-style broker-moderated trading into this new, unfettered — and often uneducated — style. While many writers have focused on the ease of trading as the main difference in dynamics, I think there are much more important new trends afoot.
     Numbers came out of Credit Suisse First Boston for August online trading levels last week, showing a continued fall in that month from July.
     Unlike the sages of old, who believed in Buy Low, Sell High, we seem to be working on a whole new cowboylike model with the online crowd. It isn’t exactly Buy High, Sell Low, but it’s dangerously close. As best I can determine, the online traders — and, more specifically, the Nasdaq market where most of them play — tend to increase trading volume when prices are going up and decrease it when prices drop. This is an obvious result of “momentum trading.”
     The less obvious result, however, is that this adds a new dynamic to how world securities markets will work. I suppose there is a wonderful opportunity for several hundred econ grad students to make up fancy new names for this rather radical change in how markets behave. Since this new law is about volume, and not price, it might be appropriate to call it the Deer in the Headlights Theory. It isn’t about moving any particular direction but about not moving at all when the only world you know, that of rising prices, suddenly goes away.

Mark Anderson is the president of Technology Alliance Partners, which provides consulting to telecommunications and computing firms. The Next Files, excerpted from Anderson’s Strategic News Service newsletter, appears every Monday.

Copyright 1999 Strategic News Service™. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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France Telecom

Microsoft Corp.

United Pan-European Cable, a vehicle for Microsoft’s cable-buying interests, has made a blanket bid for every one of Deutsche Telekom’s regional cable companies.

The online traders — and, more specifically, the Nasdaq market where most of them play — tend to increase trading volume when prices are going up and decrease it when prices drop.