Technology stocks plunged yesterday, dragging the broader market down to its lowest level in nearly six months, after Microsoft Corp. President Steven Ballmer said a "gold rush" mentality was driving tech prices too high.
"There is such an overvaluation of technology stocks it is absurd," Ballmer said at a conference in Seattle. "And I'd put our company's stock in that category."
Investors took heed. Microsoft, which had been up $2 on the news that the company was refocusing and enhancing its MSN Web operation, promptly fell $7 to close at $91.18 3/4.
The high prices for technology stocks is "a bad thing for the long-term health of the economy," Ballmer told the Society of American Business Editors and Writers. "Anything that's false is bad."
The tech-heavy Nasdaq composite index, which had been even for the day at 1 p.m., proceeded to drop 108.33, to 2749.83, a loss of 3.8 percent and its fourth-biggest decline. The Dow Jones industrial average fell 205.48, or 2 percent, to 10,318.59, its lowest close since April 9. The Dow is down more than 1,000 points from its Aug. 25 closing record of 11,326.04. The Standard & Poor's 500-stock index fell 29.74, or 2.3 percent, to 1280.41.
Among other technology stocks that fell after Ballmer's remarks were Amazon.com, down $3.75 at $62.25; Yahoo, down $5.75 at $173.75; IBM, down $3.18 3/4 at $122; and Dell, down $3.06 1/4 at $43.
Microsoft officials said that Ballmer's statements were nothing new and that he has long warned bullish investors to scale back their unrealistic expectations for profit growth.
Nevertheless, his remarks "hit the market like a bombshell out of the blue," said Frederic Dickson, research director at Branch Cabell & Co. in Richmond. "It's not common for a high-profile executive to get on a platform and comment publicly in very emphatic terms about the price of the the stocks in his own sector."
Dickson said the market currently is in a "nervous" position because of the weakness of the dollar and concerns about how the earthquake in Taiwan might affect the supply of semiconductors and other electronic components to U.S. technology firms. "The market interpreted Ballmer's comments as a signal to take profits and run for cover," Dickson said.
Ulric Weil, a technology industry analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, said Ballmer made similar comments in his last quarterly conference call with analysts. Nevertheless, Weil said it was a "highly unusual" comment to make publicly.
"Why he decided to address that issue is incomprehensible to me," Weil said. "It wasn't very helpful to his stock holdings." Ballmer, who owns 240 million Microsoft shares, suffered a paper loss of about $1.5 billion.
Ballmer has a reputation for unpredictability, but his comments came at a particularly odd time: the day Microsoft announced it was spinning off its Expedia travel service to the public. The move will take Expedia's losses off Microsoft's books while letting the software maker retain control. If the new company soars in value like other Internet stocks, that's a bonus for Microsoft.
Like most Internet companies, Expedia is burning through cash at a dramatic rate and is untested as a long-term venture. In 1998, it lost $29.5 million on sales of $13.8 million.
Still, it's one of the leading Internet travel sites, matching up customers with airplane seats, hotels and car-rental companies. As of Aug. 31, 7 million Internet users had registered with Expedia, and the service had made more than $700 million in gross bookings.
Microsoft's stock-market valuation is the highest of any company in history, but the software maker's executives had nevertheless watched in frustration as Internet companies such as Priceline--a direct competitor to Expedia--had also soared. They felt the value of Microsoft's Internet properties wasn't being properly recognized by the market.
For a while, they toyed with the idea of creating a tracking stock--essentially, a shell that would allow the Internet properties to trade as a distinct entity from the mother company. That idea was abandoned for one that seems to involve taking the Internet properties public piece by piece.
In its SEC filing, Expedia said it will sell Class A stock to the public. The Class B shares, which control the new firm, will be retained by Microsoft. The filing said the purpose of the public offering, which will raise as much as $75 million, is to give Expedia working capital as well as "direct access to capital markets."
Furthermore, the filing said, the initial public offering would give Expedia's 128 employees "more directly aligned incentives." If Expedia soars the way other Internet IPOs have, the workers will find themselves much wealthier than if the company had remained part of Microsoft.
But if Microsoft stock doesn't have the zero-to-60 zip of an Internet company, it's proven a pretty nice investment over time. In Forbes magazine's new tabulation of the richest Americans, released yesterday, Ballmer came in fourth. His boss, Microsoft Chairman Bill Gates, was first, of course--outdistancing No. 2, Microsoft co-founder Paul Allen, by a mere $40 billion.
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