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  Justice Sues to Block Microsoft Acquisition

By Elizabeth Corcoran
Washington Post Staff Writer
Friday, April 28, 1995; Page A01

The Department of Justice yesterday filed suit to block software giant Microsoft Corp.'s $2 billion bid to acquire Intuit Inc., the world's leading maker of personal finance software.

"The merger would have an immediate harmful effect on the market for personal finance software," said Steven C. Sunshine, a deputy assistant attorney general handling the case. It would lead to higher prices and less innovation, the department contended in a suit filed in U.S. District Court in San Francisco.

Microsoft Chairman Bill Gates and Intuit Chairman Scott Cook said yesterday their companies would fight the suit in court and have requested a speedy trial. "Our enthusiasm for bringing Intuit and Microsoft together is very, very strong, as strong as when we first announced the plan," Gates said in a telephone conference.

The suit is the greatest legal challenge to face Microsoft in its 20-year history. Founded as a tiny start-up business, the company now has annual sales of close to $5 billion. Its Windows and DOS operating system software, which controls the basic function of personal computers, run on roughly three quarters of the world's stock of the machines.

The suit won praise from Microsoft's competitors. Many executives in those companies contend that it is crucial to the industry's vitality to stop Microsoft, already more than twice as big as Novell Inc., the No. 2 software company, from expanding its dominance into other types of information products.

Microsoft has said it hopes to use Intuit's popular Quicken software, which accounts for about 70 percent of personal finance software sold, as the cornerstone of a strategy for building a business in on-line home banking.

Microsoft's general counsel, William Neukom, played down the impact of the suit. "It's quite normal for the government regulatory agency to challenge an acquisition and put it before the court for review," he said.

Investors appeared to take a different view. Intuit's stock dropped $10.25 to $72.75 before trading was suspended at 2 p.m. The drop reflected fear that owners of Intuit stock would not be able to benefit from Microsoft's above-market offer for their shares. Microsoft's stock declined by $1, to $78.62 1/2.

Microsoft had hoped to skirt antitrust problems by turning over Microsoft Money, a financial product it had earlier developed, to Novell on the grounds this would preserve competition. The department said that tactic did not alleviate its concerns.

The complaint filed yesterday quotes executives from Microsoft and Intuit as saying that the deal would make them virtually invincible. "Our combination gives FIs {financial institutions} one clear option, eliminating a bloody {market} share war and speeding adoption" of the Microsoft-Intuit technology, wrote Intuit's Cook in a September memo to his board. "That, in turn, enriches the terms of trade we can negotiate with FIs," he wrote.

Lawyers at the Justice Department said the suit proved they can be tough on anti-competitive practices. Microsoft's competitors criticized the department last summer after it negotiated what they considered to be a very lenient antitrust consent decree with Microsoft to settle separate allegations that the company had unfairly used its dominance in operating system software.

A U.S. District Court judge in February refused to approve that settlement, saying it wasn't in the public interest. The department and Microsoft became unusual allies when they joined together to appeal that decision.

Yesterday's suit is "the first major deal that the Justice Department has moved absolutely to block, rather than to accept a partial divestiture," since the Clinton administration took office, said James Rill, who headed the department's antitrust division during the Bush administration.

Other antitrust experts were more cautious. "I think {the Justice Department} is stretching quite a bit," said Joe Sims, a deputy assistant attorney general in antitrust during the 1970s, who suggested that the divestiture of Microsoft Money might have been an adequate solution.

Whoever wins, many of Microsoft's competitors welcomed the suit. "It's clear that the Department of Justice is now very concerned about the market power that Microsoft has because of its monopoly control of the operating system," said Steve Case, chief executive of America Online Inc., a Vienna-based company that provides on-line services.

Case said he remains worried about other issues – particularly Microsoft's plans to include in its future operating system easy access to an on-line network that it is establishing. Although the government's suit does not address that issue, "it sounds like a good first step," Case said.

According to sources close to the two parties, officials from the Justice Department and Microsoft had been meeting for about three months. But as late as last week, the government had not proposed any terms under which it might have been willing to let the merger go through.

© Copyright 1998 The Washington Post Company

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