296. Lucian Arye Bebchuk, David I. Walker, The Overlooked Corporate Finance Problems of a Microsoft Breakup, 08/2000; subsequently published in The Business Lawyer, Vol. 56, No. 2, February 2001, 459-481.
Abstract: This paper discusses several corporate finance problems with the ordered breakup of Microsoft that seem to have been overlooked by the parties, the judge, and the commentators. The breakup order prohibits Bill Gates and Microsoft's other large shareholders from owning shares in both of the companies that would result from the separation. Given this mandate, we argue, dividing the securities in the resultant companies between the shareholders is not as straightforward as the government has suggested. We show that any method of distributing the securities that complied with the mandate would either (i) impose a significant financial penalty on Microsoft's large shareholders that is not contemplated in the order, or (ii) create a risk of a substantial transfer of value between Microsoft's shareholders. We examine the difficulties and costs involved in two share distribution scenarios that would comply with the cross shareholding prohibition, and we discuss how the breakup order could be refined to reduce certain difficulties and costs. The primary purpose of this paper, however, is not to identify the best method for dividing the securities resulting from the breakup, but to highlight issues that have been overlooked thus far but should be addressed in any future examination of the breakup order.