MICROSOFT'S DIVORCE COURT

By Philip Elmer-DeWitt

It was a masterly stroke even for the software industry's master strategist-or at least it seemed so at the time. When Bill Gates announced last October that Microsoft would buy Intuit -- maker of the popular "electronic-checkbook" program Quicken -- it looked as if the software giant would not only eliminate a meddlesome competitor but also gain an instant beachhead in the fast-growing field of electronic commerce. There were grumblings, of course, about antitrust, but hardly anyone seemed to think they would lead anywhere. After all, the Department of Justice's antitrust division had just wrapped up a four-year federal investigation of Microsoft by negotiating a consent decree that the industry viewed as little more than a slap on the wrist.

But the deal did not go through as planned. Last week, three days after the government took Microsoft's side in court on an appeal related to the consent decree, the Justice Department filed suit to block the Microsoft-Intuit merger. The $2 billion deal, government antitrust lawyers argued, would reduce competition, raise software prices and dampen innovation.

What happened? In two words: Stanley Sporkin. In February the maverick federal judge rejected as inadequate the antitrust decree Gates had negotiated last summer with Assistant Attorney General Anne Bingaman, publically chastising the government's chief trustbuster for failing to curb what he viewed as Microsoft's abuse of a monopoly position. Both the government and Microsoft insist that one case had nothing to do with the other. But someone at Justice seemed to think they might be linked in the court of public opinion. The department assigned more lawyers to its investigation of the Intuit deal right after the Sporkin ruling. And instead of asking for an extension, as had been expected, the government actually filed suit to block the merger a few days early.

Microsoft last week pointedly declined to speculate on any "political connection," and vowed to defend the merger in court. "Our enthusiasm for bringing Intuit and Microsoft together is ... exactly as it was when we announced the plan,'' said Gates.

In legal terms, the two cases are quite different. In one, Microsoft has been accused of unfairly using its dominant position in operating systems (some 8 out of 10 IBM-compatible PCs run on Microsoft's software) to help it enter new markets. In the other, Microsoft is trying to buy dominance in a market where it was losing money and where Intuit had a 70% share. In fact, the company was doing so poorly with its Microsoft Money program that when the merger was announced, Gates offered to give it to archrival Novell in a deal one pundit characterized as "Money for nothing." Part of the idea was to head off antitrust challenges by creating ready-made competition to Microsoft-Intuit.

But the government didn't buy it. "The so-called fix just won't work," Bingaman said last week. As evidence that Microsoft knew the merger would kill competition, her complaint cites the memo of a senior Microsoft official. "If we were to try to buy Intuit ... I can't imagine anyone would be stupid enough to [purchase Money]," the manager writes. "I think they would imagine that we'd never be allowed to do it." The betting now is that Microsoft won't. --Reported by Suneel Ratan/Washington

With reporting by Suneel Ratan/Washington