U.S. Markets close in 4 hrs 11 mins

Jeffrey Ubben’s ValueAct Capital ups its stake in Microsoft

Smita Nair

Must-know: ValueAct Capital's notable 1st quarter 2014 positions (Part 4 of 6)

(Continued from Part 3)

ValueAct Capital and Microsoft

Jeffrey Ubben’s ValueAct Capital Management acquired new positions in Symantec Corp. (SYMC) and Expeditors International of Washington Inc. (EXPD). Although no positions were sold, the fund trimmed a position in Micros Systems Inc. (MCRS). Notable position increases included Microsoft Corp. (MSFT) and MSCI Inc. (MSCI).

ValueAct upped its stake in Microsoft Corp. (MSFT) that now accounts for 22.6% of the fund’s 1Q 2014 portfolio. Microsoft is a top position in ValueAct’s portfolio.

Microsoft adds ValueAct’s Morfit to its board

Microsoft Corp. said in March that Mason Morfit, president of ValueAct Capital, has been appointed to the company’s board of directors and its audit committee. The release said on August 30, 2013, that Microsoft and ValueAct Capital announced a cooperation agreement that gave ValueAct the option of having Morfit join the Microsoft board at the first quarterly board meeting following the 2013 annual shareholders’ meeting.

The hedge fund revealed its $2 billion position in Microsoft last year and was said to have been instrumental in former CEO Steve Ballmer’s exit. Morfit seems to have approved the choice of Satya Nadella as Microsoft’s new CEO and said in a February statement, “As an active contributor to the CEO search process, I have spent a lot of time with Satya and he is clearly the best choice to lead the company.” The stock is up more than 40% since ValueAct’s position in Microsoft was revealed and the investment seems to have paid off.

A February report from Bloomberg said ValueAct’s Morfit wants Microsoft to rely less on its flagship operating system, Windows, and enable its products and services on other operating systems. Morfit also expects Microsoft to focus more on enterprise and cloud businesses and “scale back” on hardware and consumer products.

Microsoft forges partnerships to further its “mobile first, cloud first” approach

Microsoft and its rival, Salesforce (CRM), recently announced a strategic partnership to create new solutions that connect salesforce.com’s customer relationship management (or CRM) apps and platform to Microsoft Office and Windows. This is in line with Nadella’s “mobile first, cloud first” approach under which Microsoft also announced several new and updated applications and services, including Microsoft Office for iPad and free Office Mobile apps for iPhone and Android phones in March. The company also expanded its partnership with SAP to deliver the applications and services in private clouds, service provider clouds, Microsoft Azure, and Microsoft Office. Both aim to develop innovative new programs focused on the cloud, mobility, analytics, and interoperability.

Results beat estimates with a strong boost from the cloud

The company’s FQ3 2014 results beat estimates despite a flat revenue and a fall in net income. Revenue came in at $20.40 billion, compared to $20.49 billion a year ago. Net income was $5.66 billion, or $0.68 per share, down from $6.06 billion, or $0.72 per share. Devices and Consumer revenue grew 12% to $8.30 billion while Commercial revenue grew 7% to $12.23 billion. Office 365 revenue grew over 100%, and commercial seats nearly doubled, demonstrating strong enterprise momentum for Microsoft’s cloud productivity solutions. Microsoft also completed its purchase of Nokia’s devices and services business.

For more on Microsoft and its cloud products, please read Why Microsoft’s cloud products are now driving its growth on the Market Realist website.

Microsoft drives shareholder value with buybacks and dividends

On September 16, 2013, Microsoft’s board approved a $40.0 billion share repurchase program and approximately $36.2 billion remained of this program by the end of fiscal third quarter ended March 31, 2014. Microsoft repurchased 47 million shares for $1.8 billion. In March, it declared a quarterly dividend of $0.28 per share, representing an annual yield of 2.9%.

Continue to Part 5

Browse this series on Market Realist: