They didn't. Microsoft created their own version of Java, called J++. It wasn't Java, and it wasn't extended. Now, of course, Microsoft could do the same thing to .Net, they could create a new product, call it .N++ and try to peddle that over .Net. Do you have any reason to believe that something like that, .N++ would fare any better than J++? It wouldn't. The only reason to believe it would is a strong case of clinical paranoia.
Are you daft? It doesn't matter what it was called, they could have called it "This is not Java" but that wouldn't change the reality that Microsoft licensed Java from Sun and that it was targeted at Java developers and was compatible with Java but it had Windows extensions that where not compatible. This created two fragmented versions of Java. Now the reason why this didn't work out was because Sun sued them and Microsoft had to remove this version from Windows. If Sun hadn't sued then Java would be dead now.
How is MS 2016 different from MS 1997?
The problem is not just this one specific case. They have been doing this anti competive thing for a long time. I mean just look at the SCO vs Linux case. They funded that ridiculous case behind the scenes in 2004.
Well they are still Microsoft so they have to take the bad reputation with the good. If you lie and cheat in the past don't be surprised that people don't trust you in the future. Good reputation takes a long time to build.