IBM Wins $850M Settlement vs. Microsoft

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IBM Wins $850M Settlement vs. Microsoft - 07/07/05 12:46 AM

BOSTON (AP) -- IBM Corp. will get $775 million in cash and $75 million worth of software from Microsoft Corp. to settle claims still lingering from the federal government's antitrust case against Microsoft in the 1990s, the companies announced Friday.

The payout is one of the largest that Microsoft has made to settle an antitrust-related case. And it brings the software giant closer to moving on from claims involving technologies long since eclipsed.

IBM was pressing for restitution for the "discriminatory treatment" that U.S. District Judge Thomas Penfield Jackson cited when he ruled in 2000 that Microsoft had broken antitrust law.

IBM and Microsoft once had a trailblazing collaborative relationship, dating to Big Blue's historic decision in 1981 to have Microsoft write software for the original IBM PCs.

Later, IBM and Microsoft would jointly create the OS/2 operating system. But the partnership soured, and Microsoft eventually focused on Windows and left OS/2 development to IBM.

In the mid-1990s, IBM irked Microsoft by selling PCs that were loaded with OS/2 as an alternative to Windows and with its SmartSuite productivity software, a rival for Microsoft Office programs. IBM also backed Java, a programming language that doesn't need Windows to run.

Jackson noted that Microsoft retaliated by charging IBM more than other PC makers for copies of Windows.

There were other tactics. Months before Windows 95 came out, Microsoft let other PC companies pre-install the operating system on new computers that could go on sale right after the launch. But IBM got its license only 15 minutes before the event.

As a result, many customers eager for the latest software opted for machines made by IBM's rivals. Since Windows 95 arrived in August, IBM missed out on back-to-school sales and lost "substantial revenue," Jackson wrote.

IBM didn't sue Microsoft over the findings, but kept the right to do so under a 2003 agreement between the companies. Similar talks led to a $150 million settlement with Gateway Inc. in April.

Separately, Microsoft has spent more than $3 billion in recent years settling lawsuits by rivals, including a $1.6 billion deal with Sun Microsystems Inc. in 2004 and a $750 million truce with America Online, part of Time Warner Inc., in 2003.

Redmond, Wash.-based Microsoft still faces legal challenges, including a lawsuit by RealNetworks Inc. and an appeal of a $600 million antitrust ruling by European regulators. Though software maker Novell Inc. reached a $536 million settlement with Microsoft in November, Novell got a judge's approval last month to proceed with a separate antitrust suit over the WordPerfect word-processing program.

Even so, Microsoft's general counsel, Brad Smith, said he believes antitrust issues are close to being resolved. IBM had been the biggest rival with a pending claim.

"This takes us another very significant step forward," he said. "We're entering what I think is the final stage of this process."

The $775 million payment will pad IBM's second-quarter earnings, which are due to be released in two weeks. The Armonk, N.Y.-based company is coming off a first-quarter report that included a $1.4 billion profit but fell short of Wall Street's expectations.

Microsoft set aside $550 million for antitrust claims in April, during the company's fiscal third quarter. At least part of the IBM payment could result in a charge in the company's fourth quarter; results are expected July 21.

IBM shares rose 47 cents to close at $74.67 on the New York Stock Exchange. Microsoft shares fell 13 cents to $24.71 on the Nasdaq Stock Market.

When Jackson ruled against Microsoft in 2000, he ordered the company broken into two as punishment. But a year later, the Clinton-era Justice Department having given way to the Bush administration, the government decided not to seek the breakup. The case was settled in 2002.

Even with Friday's deal, IBM reserved the right to press claims that its server business was harmed by Microsoft's behavior. But such claims appear unlikely to surface soon. IBM agreed not to seek damages for actions that occurred before mid-2002, meaning the findings in Jackson's ruling would no longer apply.

But while much of that case is anachronistic now - OS/2 faded by the late 1990s, and IBM doesn't even make PCs anymore, having sold the business to China's Lenovo Group Ltd. - there's still conflict between Microsoft and IBM.

Perhaps Microsoft's toughest competitive challenge today comes from the open-source Linux operating system, which has made steady gains especially in overseas markets. Some of Linux's biggest backing has come from IBM.
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