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The High Cost of Microsoft's Wealth

As piggy banks go, Microsoft's is legendary: Its cash hoard now totals $52.8 billion. Whenever outsiders have pressured the software giant to distribute the stockpile via an increased dividend or a significant share buyback, Chairman Bill Gates and CEO Steve Ballmer have justified the mattress money in large part by arguing that it was a good idea given Microsoft's (MSFT) many legal battles -- and large potential liability.

Well, guess what? Rather than reducing Microsoft's financial exposure, it turns out that this pile of cash may well have increased it. In a 302-page legal decision obtained by BusinessWeek, the European Commission justifies its 497.2 euro fine (approximately $591 million at current exchange rates) against Microsoft on the basis of "significant economic capacity."

SET FOR APPEAL. Indeed, the EC doubled the size of the basic penalty because of "the necessity of setting the fine at a level that ensures that it has sufficient deterrent effect." The economic analysis cites Microsoft's sizable cash and short-term investment reserves.

The remainder of the document is a detailed recitation of the two key charges: that Microsoft failed to share critical technical information with Sun Microsystems (SUNW) and that it illegally bundled Windows Media Player into its dominant Windows operating system. Readers searching the EC report for scorching e-mails or dramatic internal documents will be sorely disappointed. Most of it focuses on arcane technical discussions.

In response to the release of the decision, Microsoft issued a statement charging the EC with overreaching. "This 300-page analysis obscures, however, a critically important fact -- the commission is seeking to make new law that will have an adverse impact on intellectual-property rights and the ability of dominant firms to innovate," the statement said. Later this summer, Microsoft will have a chance to raise these arguments in an appeal to the EC's Court of First Instance.

GOLDEN OPPORTUNITY? And while Microsoft plans to seek a stay of significant pieces of the ruling, it won't try to stay the fine. Instead, its lawyers hope to overturn the penalty, and the rest of the ruling, on appeal.

Although Microsoft has been aggressively seeking to reduce its legal exposure -- for instance, settling a class action in Minnesota on Apr. 19 -- it still isn't out of the woods. More than likely, the same cash hoard that induced the Europeans to increase the size of the fine could be alluring in future court battles. Judges and juries in the U.S. are just as entitled to take account of a company's financial strength in assessing legal penalties. Sometimes, what glitters really is gold. By Mike France in New York and Jay Greene in Seattle

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