One of the great rivalries in the technology industry reached a partial truce yesterday when Microsoft agreed to pay IBM $775 million to...

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One of the great rivalries in the technology industry reached a partial truce yesterday when Microsoft agreed to pay IBM $775 million to compensate for illegal business practices that hurt the computer giant in the 1990s.

Microsoft will also give IBM $75 million in credit toward software purchases, but no payout is likely to make IBM forget how it was snookered by a young Bill Gates at the dawn of the PC era.

IBM unwittingly gave Microsoft a priceless operating-system franchise in 1980 when it hired the fledgling company to develop software for the first PC. Later, with its monopoly established, Microsoft bullied IBM for selling machines bundled with Netscape’s browser.

“This helps to put that behind us and we’re looking forward to the future,” IBM spokesman Scott Brooks said yesterday.

Both sides characterized the settlement as a turning point in their relationship and vowed to continue competing in some areas and cooperating in others.

“Stepping back from it all, it’s an important milestone in our broader effort to resolve the antitrust issues with other companies in the industry,” said Brad Smith, Microsoft’s chief counsel. “This is the type of agreement that helps us put the past behind us and focus on the future, and that’s clearly what we want to do.”

With yesterday’s settlement, Microsoft has paid nearly $6 billion to resolve private antitrust suits stemming from a federal judge’s 2000 ruling that the company is liable for damages caused by its past business practices.

Payback time

With yesterday’s IBM settlement, Microsoft has paid more than $5 billion to resolve private antitrust cases, plus the $612 million fine paid to the European Union. Still pending is a $1 billion case brought by RealNetworks.

Here are the big payouts:

IBM: $850 million, including $775 million in cash and a $75 million credit toward software purchases, July 1, 2005.

Gateway: $150 million, April 2005.

Novell: $536 million, November 2004.

Be Inc.: $23 million, September 2003.

Sun Microsystems: $1.95 billion, including $900 million to settle patent litigation and $350 million for technology licenses, July 2003.

Time Warner/Netscape: $750 million, May 2003.

Consumer class action: More than $1.5 billion, mostly in vouchers, including a $1.1 billion settlement in California.

Brier Dudley

U.S. District Judge Thomas Penfield Jackson cited IBM in his findings of fact in the landmark Microsoft antitrust case, describing how Microsoft threatened to withhold marketing support dollars because IBM refused to ship PCs loaded exclusively with Microsoft’s Internet browser.

The settlement resolves all discriminatory pricing and overcharge claims based on the case findings, the companies said. It also resolves antitrust claims related to IBM’s OS/2 operating system and SmartSuite products.

Still outstanding is a $1 billion antitrust suit that RealNetworks filed against Microsoft in 2003 and additional claims that could come from Novell.

Right to sue reserved

IBM didn’t completely bury the hatchet. It reserved the right to sue Microsoft over potential server-product damages incurred after July 2002. IBM is also involved in the continuing European Union antitrust case against Microsoft.

But Smith’s comments suggested the threat of an IBM suit has largely passed. “With the IBM agreement now in place, it leaves RealNetworks as the company with the principal remaining claim against us,” he said.

Yesterday’s announcement lacked the bonhomie that marked Microsoft’s earlier settlements with Sun Microsystems and Time Warner’s Netscape division. Top executives announced those deals and outlined broad technology-sharing deals moving forward.

“It says they’re just buying their way out of this mess, and IBM is not, at this point, feeling too threatened by what’s going on,” said Jeff Shohet, an antitrust lawyer at PLA Piper Rudnick Gray Cary in San Diego.

Impact on earnings

It’s unclear how the settlement will affect Microsoft earnings. Last quarter, the company set aside $550 million to cover antitrust settlement expenses. Smith said the company will figure out how to account for the cost and review it with auditors before the quarterly earnings report July 21.

Investors are unlikely to care much about the legal costs, said analyst Brendan Barnicle at Pacific Crest Securities in Portland.

“No one will hold that against them,” he said. “Everybody always looks at the settlement of those deals as a positive, because it puts those suits behind them.”

Barnicle also noted that analysts generally treat legal settlements as one-time events and don’t count their cost when calculating whether a company met earnings targets. He estimated the additional $225 million in cash needed to cover the IBM payout is equal to seven days of Microsoft’s free cash flow.

“That’s chump change for Microsoft,” he said.

Brier Dudley: 206-515-5687