The Overlooked Corporate Finance Problems of a Microsoft Breakup
This paper identifies problems with the ordered breakup of Microsoft that seem to have been completely overlooked by the government, the judge, and the commentators. The breakup order prohibits Bill Gates and other large Microsoft shareholders from owning shares in both of the companies that would result from the separation. Given this prohibition, we show, dividing the securities in the resultant companies among the shareholders is not as straightforward as the government has suggested. Any method of distributing the securities that would comply with this mandate would either (i) impose a significant financial penalty on Microsoft's large shareholders that is not contemplated by the order, or (ii) create a risk of a substantial transfer of value between Microsoft's shareholders. In addition to identifying the difficulties and costs involved in the two distribution methods that would comply with the cross-shareholding prohibition, we examine how the breakup order could be refined to reduce these difficulties and costs. The problems that we identify should be addressed if a breakup is ultimately to be pursued and should be taken into account in making the basic decision of whether to break up Microsoft at all.