Even though the Dow Jones Industrial Average has pulled back today, Microsoft shares are on, what can be described for this staid company, as a tear. As I write, the stock is at $31.76, up nearly 3.8 percent. Back in February they were barely above $27. Shares have been climbing steadily lately, but the biggest reason for the latest goose is the emergence of ValueAct Capital Management as a small but still significant investor. Small because the hedge fund’s $2 billion investment represents less than 1 percent of Microsoft shares outstanding. Significant because ValueAct’s founder and chief executive, Jeffrey Ubben has a reputation as an activist investor.
A former managing partner at Blum Capital Partners and, before that, running Fidelity Investments’ Fidelity Value Fund, Ubben is “known for flipping things around, investing in companies and seeking out board seats and changes in companies it invests on,” writes Mellisa Tolentino on the blog Silicon Angle. According to the Wall Street Journal, “the disclosure revived hopes among some Microsoft investors that an influential shareholder could spur changes to a stock price roughly even with 2002 levels.” The story continues:
It also isn’t the first time a sometimes-activist investor has talked up Microsoft. Also at an investor conference nearly two years ago, hedge-fund investor David Einhorn lauded Microsoft, but said the company was being held back by the management of Chief Executive Steve Ballmer.
Holding 1 percent of the stock won’t give a great deal of leverage, and Microsoft is much larger than previous Ubben targets such as Acxiom and Gardner Denver. Nor is this the first time a large investor has claimed that Microsoft shares should be worth much more, or that Ballmer is to blame. But this is a development to watch, and with some unease. Microsoft’s missteps are undeniable. But Wall Street’s appetites are for creative destruction and short-term profits. If that means cutting thousands of dollars and gutting the R&D needed to thrive beyond the next quarter, tough luck. Activist investors don’t value what might be considered the “social rate of return” that the Puget Sound region derives from being home to this giant company.
Microsoft is huge and makes vast amounts of money. Both are shields against destruction without the creative part. And some activist investors, ones willing to be patient, can be very constructive. I’ve also seen companies destroyed by them, one example being the old Dial Corp., the crown jewel of Phoenix’s business establishment, that was the target of a vendetta on Wall Street that essentially wrecked the company. Now it’s a subsidiary of a German firm and Phoenix has never gotten over the loss of the headquarters and its corporate leadership. And this was once a company vying to take the mantle of Procter & Gamble.
I know, Microsoft is different. Fine. I’m paid to worry.
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Today’s Econ Haiku:
At King Street Station
Its glorious look restored
Back to the future