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Friday, August 30, 2013

Microsoft Cuts Deal With Activist Shareholder to Avoid Fight

The saga of Steve Ballmer’s departure/retirement from Microsoft continued Friday with an agreement between Microsoft and an activist shareholder, ValueAct Capital, that averts a potentially nasty battle over the company’s lagging performance.

Microsoft said in a statement that it has signed a “cooperation agreement” with ValueAct for regular meetings between G. Mason Morfit, president of ValueAct Capital, and Microsoft’s board and management to “discuss a range of significant business issues.” More significantly, the deal gives Mr. Morfit the option of joining Microsoft’s board, which he is likely to do in early 2014, during the company’s quarterly board meeting.

The deal comes exactly a week after Microsoft announced that Mr. Ballmer, its chief executive, will retire from the company within the next 12 months after a successor is found. It is widely believed that pressure on Microsoft’s board from ValueAct played a role in speeding Mr. Ballmer’s departure, though Microsoft has downplayed a connection between the two.

ValueAct, a San Francisco investment firm with $12 billion in assets under management, owns only a small chunk of Microsoft’s stock, about 0.8 percent of its outstanding shares. But Rick Sherlund, an analyst at Nomura Securities who was the first to report on ValueAct in a research report back in May, has said that ValueAct could have banded together with other shareholders dissatisfied with the performance of Microsoft’s stock. Had Microsoft resisted ValueAct’s efforts, the investors could have mounted a public fight, known as a proxy battle, to nominate a representative to the company’s board.

The timing of Microsoft’s announcement of the deal â€" late Friday before a long weekend â€" appeared calculated to minimize the attention it would receive. It also coincided with a deadline by which ValueAct had to notify Microsoft of its intentions to begin a proxy fight.

“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 said in its statement.

By announcing plans for Mr. Ballmer’s departure last week, Microsoft has already made a major concession to ValueAct on one of the issues believed to be on its agenda. Among other shareholder demands is a big increase in the company’s dividends.

George F. Hamel Jr., a founder of ValueAct, did not respond to a request for comment on the firm’s plans. Mr. Morfit said in a statement: “At this critical inflection point in the company’s evolution, I look forward to actively working together with the board and Microsoft’s management team to continue to create value for all shareholders.”

Microsoft and many of its shareholders have been at odds for years. The conflict stems in large part from the long-term investments Microsoft has made in areas like Internet search, which Mr. Ballmer and the company’s board have argued are essential to Microsoft’s future. Investors have been frustrated, though, with the lack of traction that many of Microsoft’s newer initiatives have gained.

In an interview before Microsoft announced its agreement with ValueAct, Mr. Sherlund said he believed the company’s board was finally showing signs of being more receptive to input from shareholders.

“I think you are seeing a monumental shift in corporate governance under way at Microsoft,” Mr. Sherlund said. “Now they are open to talking to shareholders.”