MSFT: Info Vacuum, Trading Frenzy

In the brief history of after-hours trading, tonight’s announcement of Judge Thomas Penfield Jackson’s formal legal ruling in the Microsoft antitrust case about an hour after the close has to be one of the all-time big events. Between 4 and 5 p.m., in fact, more than a million shares of MSFT traded hands–impressive volume considering it was a period of just a few dozen minutes, filled with precisely no new information at all. In fact, a lack of new, surprising information characterized the entire frenzy around the release of Jackson’s decision.

Settlement talks fell apart over the weekend, and MSFT opened sharply down and drifted lower, finishing the day off by about $15 a share, to about $90. In the void between the official market close and the moment when after-hours trading was halted for the official announcement, it moved up about a buck a share. The announcement itself pretty much tracked the findings of fact released months ago by Jackson, in both tone and substance–just as everyone assumed all along.

In the last 12 months, Microsoft shares have traded for between about $75 and $120. The emerging conventional wisdom is that there is just “too much risk” in the stock now. But for all the trading fury both during the session and after, what has really changed? After all, the judge’s ruling won’t have any immediate effect whatsoever on, say, Microsoft’s actual profits. The real impact on the company won’t be clear for some time–it’ll take months for a remedy proposal to get settled on, and there will no doubt be appeals beyond that. But imagine what happens under the consensus worst-case scenario: The government forces Microsoft to break up. Is that certain to be bad news for shareholders? Actually, no. Plenty of people have argued that a broken-up Microsoft would actually benefit investors, as the newly created parts would actually have greater growth potential than the current whole.

So why panic and sell? It’s hard to imagine that anyone who follows the company really believes that it is suddenly worth almost 15 percent less percent today than it was on Friday. Wisdom of the markets aside, plenty of people look at the antitrust trial as a series of short-term trading events and are trying to play sentiment, not facts. The market is a wonderful digester of information, but there really is very little information here to digest that is truly material to Microsoft’s ability to, for example, sell Windows or Office in the immediate future. The people (and presumably institutions) trading Microsoft in the last several hours) are trying to out-guess each other’s reactions to the confirmation of something everyone had expected anyway, and that merely sets in motion a long process whose ultimate outcome is anybody’s guess.