The Vancouver Solution: What If Microsoft Tried to Flee?

The rumor spread like a computer virus: After months of being battered in the courts, Microsoft had come up with a solution to its Joel Klein problem. To escape the Justice Department’s clutches, the company would simply move to Canada.

The scenario was as nifty as it was improbable: The shining star of America’s corporate firmament turning into a corporate fugitive, dodging its own Vietnam. What a wonderful mix of cowardice and moxie! With but a shuffle 100 miles north, from Redmond to Vancouver, Microsoft could evade the Justice Department’s successful five-year campaign to break up the Windows monopoly. It could outmaneuver the federales by crossing its own Rio Grande. In exile but intact, Bill Gates could muster a last laugh.

Then, on June 2, the British Broadcasting Corporation ran with it, reporting that “the company is being encouraged to relocate its operations to neighboring Canada.” Officials in British Columbia, the province just to the north of Washington state, had gone giddy over the prospect of a rich vein of new tax revenue, not to mention revenge for all those relocated hockey teams. The BBC also reported that there were rumors of “secret discussions” between Microsoft and British Columbia’s provincial government. Microsoft denied it.

So where was all this coming from?

There are theories.

1. Microsoft itself.

This theory rides on ill will toward Microsoft. Once a bully, always a bully, the thinking goes.

“I’m certain that they are leaking that one around the Congress and the Senate as we speak, because that’s the kind of thing that makes politicians worry, being seen as forcing companies offshore,” said Robert Young, chief executive officer of Red Hat, a Microsoft rival. “It would shock me if they were not doing it explicitly through the apparent army of lobbyists they have in Washington.”

Representatives Anthony Weiner and Jerrold Nadler of New York, who both sit on the House Judiciary Committee, denied having heard rumors of a Microsoft plan to flee abroad.

Jim Cullinan, a spokesman for Microsoft, insisted Microsoft had no role in it. “We have more important things to do than start rumors about leaving, which we have no intention of doing,” he said.

Mr. Young, however, may be prone to think the worst of Microsoft. Since the Justice Department stepped in, Mr. Young’s Durham, N.C., software company has been able to make agreements “without ourselves or our partners having to fear reprisals from Microsoft,” he said.

Moving to Canada is an idle threat, Mr. Young is convinced. But it’s a threat he’ll attribute to Microsoft nonetheless.

2. The Canoe Connection.

“I didn’t get it from anywhere; just sitting over a beer somewhere.” Make that a Canadian beer: “I usually drink Blue,” Tim Whitehead said.

Mr. Whitehead runs a “one-person economic consulting firm” in Paris, Ontario. One day last fall he was sitting at a bar, thinking over Microsoft’s Justice Department dilemma. In November, his thoughts ran on Canoe Money, a Canadian financial Web site for which he writes regularly, under the headline: “Canada Could Save Microsoft.”

“It really boils down to little more than something you sit around in a bar and say, ‘Why don’t you try this,’” said Mr. Whitehead, who sports a beard and normally restricts his twice-weekly Canoe Money columns to economic issues like the inaccuracies of the Canadian consumer price index. “What struck me, they’re only 100 miles south of the Canadian border and when you’re talking about brains, they’re pretty easy to move.”

Many of his readers agreed. Out of 1,000 or so who responded to a poll that ran alongside his column, about 70 percent (virtually all Canadians) said Microsoft should move north. Mr. Whitehead decided to ship the column and the poll results off to Microsoft. No one from the company responded. But, Mr. Whitehead noted, who knows on whose desk his column landed? “I hope I get a commission on it,” he said.

3. Blame Canada.

“There have been talks, at a low level, absolutely, for sure,” said Michael Murphy, author of the California Technology Stock Letter , referring to talks between Microsoft and British Columbia officials. Mr. Murphy urged the talkers on in the May 26 issue of the 8,000-circulation newsletter, under the headline “Microsoft Should Move to Canada.” Concluding that Mr. Gates’ nemesis, federal Judge Thomas Penfield Jackson, “doesn’t have a clue” and “the inmates are running the asylum,” Mr. Murphy urged Microsoft to incorporate in Canada.

Mr. Cullinan said Microsoft believes it’s Mr. Murphy’s report that gave the rumor its big boost. BBC reporter David Willis soon after contacted Gordon Wilson, British Columbia’s Minister of Employment and Investment, who knew a good idea when he heard one–and told Mr. Willis Microsoft would be a “welcome asset.” Mr. Willis saw this statement as evidence that “the company is being encouraged to relocate its operations to neighboring Canada,” setting off a worldwide media frenzy.

Mr. Wilson told The Observer, however, that British Columbia has made no overtures to Microsoft, but merely told Mr. Willis, “We will obviously keep lines of communication open, and if they ever come to us for assistance, they’ll receive a favorable hearing.”

Mr. Willis could not be reached for comment.

A Great Idea

But would a move to Canada prevent the breakup of the $360 billion behemoth? Should Bill Gates have “Oh, Canada” programmed into the futuristic sound system of the $53 million wonderland he calls home?

David Boies, lead trial attorney for the Justice Department in the Microsoft case, said a move to Canada, “would not avoid the consequences of the judge’s order.”

As for using a move as a threat, Mr. Boies said, “It doesn’t sound likely to me.

“I don’t think Microsoft had anything to do with it,” he added.

Mr. Murphy, however, insists he heard the rumors from Microsoft people. “People in the Valley have been talking about it,” he said. “I’ve heard Microsoft people talking about it at parties.

“I thought it was a great idea.”

He’s not alone.

“The product is about the easiest in the world to ship, and Microsoft may be giving thought to moving its operations overseas,” said University of Virginia economics professor Kenneth Elzinga, a Microsoft consultant. “It isn’t like mining diamonds in South Africa.”

And what’s a little corporate bigfooting, north of the border? Canada does not exactly condone monopolies, said Lindsay Meredith, associate dean of the Simon Fraser University business school in British Columbia. But, he said, it didn’t win a divestiture until a few years ago, and that win was overturned.

George Washington University’s Bill Kovacic, a professor and oft-quoted antitrust expert, said it’s a risky idea, but it could succeed. “There has never been a case in United States antitrust history in which a defendant with production assets completely outside the U.S. was forced to break up its overseas assets,” Mr. Kovacic said. “In theory, the power to do that exists, but it poses some political and practical difficulties.”

Mr. Kovacic said Microsoft could leave the United States and sell through an intermediary, leaving the U.S. government powerless to do anything but levy fines. “Imagine the European Union ordered the U.S. government to break up Boeing into several pieces. How would the U.S. government react?”

As for the 20,000 American employees and their families who would have to make the migration north: Vancouver is a sprawling port city nestled between mountains and the Strait of Georgia, overlooking Vancouver Island. It’s cool, damp and lush.

“It’s a gorgeous area. People who like Seattle would probably like Vancouver,” Mr. Elzinga said. “This is a very short move geographically, and the culture of the two cities is similar.”

Mr. Gates won’t even have to abandon his 66,000-square-foot lakeside villa: Murray Nickel, whose Vancouver-based company Nickel Bros. is British Columbia’s largest barge mover, said he’ll carry it north, for a modest $5 million or so–chump change to the world’s richest man. “We’d move it on a very, very large barge,” Mr. Nickel said.

Not So Fast

But even if Canada did successfully woo Microsoft, do-gooder and perennial presidential candidate Ralph Nader insists it would end unhappily. “You’re inviting the biggest potential consumer boycott in American history,” Mr. Nader said. “This is the icing on the cake of Microsoft’s unsurpassed arrogance, unsurpassed arrogance.”

Steven Houck, former lead attorney representing states in their case against Microsoft who is now in private practice at Reboul, MacMurray, Hewitt, Maynard & Kristol in New York, called the plan “a doomsday scenario for Microsoft.

“If he found they did this deliberately to evade his order, the judge can sanction them severely,” Mr. Houck said. He could also block the move: Mr. Houck guessed the Justice Department could seek an injunction.

But Mr. Houck, like almost every anti trust expert contacted, declined to guarantee Bill Gates wouldn’t pass up–in his words– “giving the bird to Washington.

“I took his deposition for a day and I still don’t understand him,” Mr. Houck said. “I’m not Microsoft, and I clearly don’t think like Microsoft.”

Bob Litan, vice president of the Brookings Institution and onetime U.S. Justice Department lawyer, agreed that the Vancouver solution is not “sufficient to get [Microsoft] out of trouble.

“It would be such a transparent and incredibly audacious maneuver that I can’t believe the Justice Department couldn’t find a way to stop it–the U.S. Justice Department has close relations with Canadian antitrust authorities,” Mr. Litan said.

“It is conceivable by all means that Microsoft individuals, and especially management, could find themselves in contempt of court,” Mr. Litan said. The Securities and Exchange Commission, Mr. Litan noted, could force Microsoft to give up its Nasdaq “MSFT” sobriquet, resigning it to trade on the recently reconstituted Vancouver Venture Exchange. And the Justice Department would tell Bill Gates, “‘If you’re taking your company out of the United States, you can never come back here.’ He loses his house,” Mr. Litan said.

“It would certainly keep a lot of lawyers busy trying to figure the whole thing out,” he added, chuckling.

Wall Street, on the other hand, might like it, said Deutsche Banc Alex.Brown analyst W. Christopher Mortenson, who covers Microsoft from the bank’s New York offices. “If Microsoft stood up and said, ‘We’re going to move to Canada, here’s how we’re going to do it and here’s how we’re going to get away with it,’ I think Wall Street would applaud.” Nonetheless, not all Microsoft shareholders would be satisfied, he said. “Would they want to own [American Depository Receipts] or trade on the Vancouver stock exchange or whatever? That may be a problem.”

Canadian antitrust officials may not be thrilled, either. “We would definitely be discussing with the U.S. if any company was trying to escape one antitrust authority by moving to another antitrust authority,” said André Lafond, deputy commissioner of the Civil Matters branch at the Canadian Competition Bureau. “Because a company employs so many people, that does not mean it can violate the laws of competition.”

But Mr. Litan said, “The Canadian government could be very happy to see 25,000 Americans move north, and many of them would be millionaires.”

The very idea puts Canada–yes, Canada–in a powerful position against the U.S. Al Gurhan, co-founder of a popular Canadian Web site, SaveOurGame.com, that lobbies to keep professional hockey teams in Canada, sees Microsoft more as a bargaining chip than a blue chip. “Now Calgary’s up for grabs,” he said of the Calgary Flames, whose dwindling season ticket sales have them seeing stars and stripes. “Maybe we could swap Calgary for Microsoft.”