Thursday morning’s announcement that Microsoft Corp. is buying Great Plains Software in a stock deal worth $1.1 billion marks a significant departure for both the software giant’s corporate strategy and the market for small business software.

“This is a stunning departure from Microsoft’s previous strategy,” says Rob Kugel, a securities analyst with First Albany Corp. “Up until now, they have not been in the packaged applications business” for vertical markets.

For years, Microsoft concentrated its efforts on the Windows operating system and the MS Office productivity packages. The company also recruited vertical market independent software vendors, or ISVs, to write systems around the Microsoft desktop. By the mid-1990s, it had the playing field virtually to itself.

But in recent years, Microsoft’s development efforts have been largely focused on the Web. With this deal, it’s re-emphasizing its focus on the desktop and network server market and, for the first time, actively competing with ISVs, a tack it had previously avoided.

According to Kugel, the target customer in this market usually has less than $500 million in annual sales and no more than a few hundred employees. Since most of these companies are too small to afford a multimillion custom- developed software system from a Deloitte & Touche or an Andersen Consulting, they are heavily dependent on local resellers to install their systems.

Kugel sees Microsoft’s acquisition of Great Plains as a move that will solidify the software company’s position with the reseller channel. He expects the channel to undergo significant consolidation during the next few years, and by dealing with a few large, national organizations, Microsoft should be in an even stronger position to push its products through to the user base.

The deal is structured as a stock purchase. Each share of Great Plains will be exchanged for 1.1 shares of Microsoft common stock. Great Plains had 21.3 million shares outstanding as of Nov. 30, 2000, the end of its second fiscal quarter.

Microsoft fell to a 52-week low of $41.50 on Wednesday, and on Thursday the shares traded up $2.06 to $43.56 in a generally strong market. Great Plains closed at $35.31 on Wednesday, and gained $11.75 to $47.06 on Thursday.

Both stocks are well off their 52-week highs. In the case of Great Plains, the stock has been hammered as investors grew disillusioned with its acquisition strategy of the past year. The company earned $4.2 million on $75.5 million in sales for the second quarter compared to earnings of $4.6 million on sales of $47.4 million in the year-ago period.

But what is Microsoft getting for its money? Great Plains has been known for small business accounting systems, but in the last few years, its acquisitions have given it a presence in certain markets such as customer relationship management systems and logistics applications.

The packages Great Plains acquired were geared to businesses that fell below the radar screen of the large, enterprise systems vendors like SAP and Oracle.

Rob Enderle, a vice president with the market research firm, Giga Information Group, says Microsoft had built its own small-business CRM system, but had little success selling it.

With the deal for Great Plains, Microsoft gets the technology it had sought and can position itself as a one-stop shop for small businesses. Essentially, Microsoft can go out with a sales pitch that says that customers need look nowhere else. They can use Microsoft operating systems, office productivity tools like Word and Excel, Internet browsers, accounting systems, and customer service and marketing applications. There won’t be much room for anyone else.

But will it fly? Some people might have forgotten about Microsoft while the entire universe distracted itself with the vote counting and legal wrangling in Florida, but the company is still the target of one of the highest profile antitrust trials since the landmark cases of the 1970s against IBM and AT&T.

With the pending end of the Clinton Administration and its relatively activist role in antitrust enforcement, this might be an opportune time for Microsoft to pursue a merger that gives it a dominant share of a lucrative market. Then again, it might not.

William Kovacic, a professor at George Washington University School of Law has followed the Microsoft trial closely, and he argues that the position adopted by President Bush’s appointees to the Justice Department and the Federal Trade Commission is only one factor. There are other regulators who will have an opportunity to stop, or at least delay, this latest Microsoft transaction, if they’re concerned with the market position Microsoft will gain.

Over the last 20 years, Kovacic says, the states have assumed a greater role in antitrust enforcement, and in the last decade, the European Commission has gained a status in international antitrust enforcement that rivals the U.S. Justice Department.

“The power to shape antitrust policy is seeping out of Washington,” he says.

The regulators will try to determine if the market includes alternatives to Great Plains. If small and medium businesses have options and can buy accounting and CRM software from other suppliers, then the acquisition can sail through. But if Microsoft can combine its existing market position in operating systems with Great Plains vertical market applications to cut competition off before it emerges, then antitrust regulators will look at the deal with a bit more skepticism.

“The antitrust system will look at this deal very carefully,” Kovacic says.