Microsoft Signs Pact To Cooperate With Activist ValueAct

Microsoft Corp. (MSFT) signed a pact to cooperate with ValueAct Holdings LP, an agreement that could bring an activist shareholder onto the board of the world’s largest software maker as it undergoes a leadership change.

Microsoft said yesterday that it will hold regular meetings with ValueAct Capital President Mason Morfit and “selected Microsoft directors and management to discuss a range of significant business issues.” The Redmond, Washington-based company said ValueAct has the option of having Morfit become a director beginning at the first quarterly board meeting of 2014.

Our board and management team are committed to enhancing growth and value for Microsoft shareholders, and we look forward to ValueAct Capital’s input,” Microsoft Chief Executive Officer Steve Ballmer said in a statement.

The announcement came at yesterday’s deadline for proxy contests and other matters for the company’s November shareholder meeting, and during a period of drastic change for Microsoft. Beset by competitors including Apple Inc. and Google Inc. that have shifted the technology landscape away from Microsoft’s core personal-computer industry, the company last week said CEO Ballmer would be retiring within 12 months.

Microsoft’s board has established a search committee to seek a new CEO. If Morfit joins as a director next year, he could become involved in the search if a successor to Ballmer hasn’t yet been found.

ValueAct’s Goals

ValueAct in April had disclosed a stake of about $1.9 billion in Microsoft. The investor has been seeking a return of more money, according to a person with knowledge of the matter. Microsoft has $77 billion in cash and investments.

ValueAct had also been negotiating for a board seat, a person with knowledge of the matter said in July. If the shareholder didn’t reach an agreement with Microsoft, ValueAct was mulling a proxy contest to gain a seat, the person said.

“It’s a concession to shareholders,” said Sid Parakh, an analyst at McAdams Wright Ragen in Seattle. “They do realize they would have probably lost a proxy battle which wasn’t worth it, so it seems like it’s a good compromise.”

Representatives for ValueAct didn’t return calls for comment. In a statement, Morfit said Microsoft is at a “critical inflection point” and added that he was looking forward to working with the board and management.

ValueAct’s Stake

Microsoft said ValueAct owns about 0.8 percent of its shares outstanding and has $12 billion under management. The pact means ValueAct will not be involved in discussions of this year’s annual dividend, which typically take place at the board’s September meeting.

Under the agreement, ValueAct also said it wouldn’t propose or seek any extraordinary transaction like an exchange offer and wouldn’t pursue or participate in a proxy contest.

ValueAct also favors having Microsoft focus more on business software and Internet-based cloud services, putting less emphasis on consumer products, said the person with knowledge of the matter. In several years, “we’ll stop talking about PC cycles and instead talk about Microsoft as the largest cloud-computing company in the world,” ValueAct CEO Jeffrey Ubben said in April.

Activists have recently targeted other technology companies. Billionaire investor Carl Icahn is pushing Apple Inc. to return more of its $146.6 billion in cash via a buyback, and has fought for Dell Inc. (DELL) to remain public and pay out money instead of going private in a leveraged buyout.

Past Targets

Hewlett-Packard Co. (HPQ) in November 2011 added Ralph Whitworth to its board after the co-founder of activist investing firm Relational Investors LLC amassed a stake and pushed for changes. Whitworth became chairman in April amid a second board overhaul while CEO Meg Whitman struggles to turn around a business facing a historic PC industry slump.

Ubben started ValueAct in 2000 after working at Blum Capital Partners LP, a San Francisco investment firm. He assumed the role of chairman at Martha Stewart Living Omnimedia (MSO) Inc. in 2003 after Stewart was indicted for lying to regulators about a stock sale.

Prior investments ranged from stakes in Sara Lee Corp. to Moody’s Corp., the New York-based credit rating firm. In August 2006, ValueAct reported holding a 3.3 percent stake in Reuters Plc, then the world’s largest publicly traded provider of financial data; Reuters later agreed to be acquired by Thomson Corp.

ValueAct initially took a stake in Microsoft during the first quarter, reporting that the firm held 33.4 million common shares. By June 30, the stake had increased to 57.8 million shares.

Source: Bloomberg