I don’t know what’s on the mind of hedge-fund manager Jeffrey Ubben and his $2 billion bet on Microsoft stock.
Since the move by his ValueAct Capital was announced, Microsoft shares have hit a five-year high. Something’s going on.
Activist players such as Ubben often invest in underperforming companies to try to force change by seeking board seats or otherwise pressuring the target to sell or radically restructure.
A classic example is Gardner Denver, an industrial-machinery maker headquartered in suburban Philadelphia. ValueAct took a stake in the 154-year-old company last year, forced out its chief executive and helped push it into a sale this year to KKR, the famed New York private-equity outfit.
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The $3.7 billion deal is now facing a lawsuit claiming that the acquisition undervalues the company, although it doesn’t name ValueAct as a defendant.
You get the idea. When somebody like Jeffrey Ubben shows up, a company will be in for the meat-grinder treatment and any communities that depend on it can expect massive retrenchment.
That’s not going to happen at Microsoft.
The largest individual shareholder there is Bill Gates, who picked the much-criticized Steve Ballmer to succeed him as chief executive and has also consistently supported him. Gates is famous for being uncomfortable about firing people. He also shares some blame for Microsoft’s lost decade. The seer of the road ahead missed plenty, including the search breakthrough that made Google a giant.
So barring a major catastrophe, Gates is unlikely to join an outsider’s coup against Ballmer, much less be responsible for private equity destroying what was his life’s work before he left to become a full-time saver of the world.
Microsoft underperforms the market. But its huge earnings and strong balance sheet allow it to pay an attractive dividend and buy back shares. It returned $10.7 billion to stockholders in fiscal 2012.
As a result, it is one of the most widely held stocks, with a who’s who of institutional investors and mutual funds. It may not be sexy or thrill the digeati, but Microsoft is a blue chip, a value stock, and that gives many investors peace of mind.
Another possibility is that Ubben sees a longer game at work and wants to get in while the stock is still relatively cheap. He’s not a patient investor, such as Warren Buffett, but he’s not all vulture. The average holding period for his $7.8 billion fund is about 3 years.
That’s plenty of time to see if Microsoft’s manic remake, highlighted by Windows 8 and the Surface tablets, yields results. The company will never be what it once was, not with Google, Apple, Samsung and a rising generation of Chinese competitors. But it stands a decent chance of still remaining a force, and one with higher value for shareholders.
That, at least, might be the bet. If Ubben sold today, he would already make a tidy profit.
For those of us in the Puget Sound region, where Microsoft is not a play but a rock of the economy, the question of a genuine Microsoft turnaround gains urgency every month.
Not long ago, Microsoft was pummeled for not being Apple. Lately, as Apple has swooned, observers have talked about it becoming the next Microsoft. The Wall Street Journal recently coined the term “tech’s rust belt” to refer to Microsoft and other laggards.
Can Microsoft possibly catch up from the blunders that caused it to be so late with tablets, smartphones and search? Can it move to new platforms and businesses fast enough to avoid the decline of the personal computer?
And can it leapfrog, as it attempts to do with Windows 8, without endangering its bedrock businesses? The frustration of desktop users who lost the familiar start button with Windows 8 even inspired a parody Hitler reaction on YouTube.
Microsoft faces, as Mat Honan wrote in Wired magazine, “a tricky, almost impossible, balancing act. It must get new customers to buy its products because they want to, not because they have to … But it also has to make sure it doesn’t lose its existing customers.”
This was somewhat the situation facing General Motors for many years, and it’s why I regularly hear from readers that Microsoft is replaying a script that leads to extinction. GM avoided that fate, thanks to a federal bailout that won’t be forthcoming for Microsoft.
Having covered GM in the late 1980s, I wrote a column two years ago about some of the parallels and differences. It did little to silence the drawing of comparisons.
Yet Microsoft is spending $9.8 billion on research and development this year alone. The old GM suffered from decades of underinvestment. GM faced high manufacturing costs and a massive pension load, neither of which is true for Microsoft.
On the other hand, GM was the dominant player attacked by new, nimble competition that had a better sense of where public tastes were heading. Attempts to bring out sexier cars were hobbled by fear of losing big-fleet customers, such as rental-car companies, that wanted bland wheels.
When I covered GM, it employed some of the finest designers and engineers in the world. It was also receiving big givebacks from labor and some of the best ideas on the factory floor were coming from union members. But much of this talent and skill was stifled by top management and a toxic culture.
To use one prominent example, Saturn, the attempt to beat the Japanese automakers at their own game didn’t fail because of the engineers or workers. It did so because the bosses in Detroit essentially lost interest.
If there’s a lesson, it’s that even a blue chip with seemingly endless resources eventually runs out of road.
For now, Microsoft makes so much money it can drive a long time.
It may never be cool again. It will never be dominant again as it was at the turn of the century. Yet it stands a decent chance of finding the keys to being a newly powerful and profitable force in the emerging technology landscape.
Jeffrey Ubben and other investors — and Seattle — have a lot riding on the proposition that the company is on the verge of just such a breakout.
You may reach Jon Talton at email@example.com