Signs are growing that Microsoft Corporation (NASDAQ:MSFT) will be the next tech company to face activism from shareholders. Nomura analysts have been hinting since at least May that some shareholders may be getting antsy with the company.
Nomura analyst Rick Sherlund appeared on Bloomberg TV today to talk briefly about the company’s reorganization, which was announced on Thursday, and the bigger issues he sees developing at the company.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Problems At Microsoft
Sherlund said there’s an innovation issue at Microsoft because the company largely missed out on tablets and smartphones, and the reorganization doesn’t fix that problem. He sees the reorganization as being better for the company in the longer term rather than the near term. Right now though, he sees a bigger issue unfolding for Microsoft Corporation (NASDAQ:MSFT).
Today he again explained why he thinks Microsoft Corporation (NASDAQ:MSFT) could be facing activism from shareholders, specifically in connection with its extra cash. (Who’s having flashbacks of Apple Inc. (NASDAQ:AAPL) versus David Einhorn right now?)
ValueAct Capital’s Potential Activism
In August, Sherlund believes the activist firm ValueAct Capital will request a seat on Microsoft’s board. You may remember that filings in June indicated that the Federal Trade Commission gave ValueAct Capital the green light to proceed with activist behavior, potentially by seeking a seat on the company’s board.
He doesn’t think Microsoft CEO Steve Ballmer will begin looking at returning cash to shareholders on his own, and he said this creates a window of opportunity for shareholder activism, specifically for ValueAct. He said the firm could make a case about what to do with Microsoft’s cash, secure a seat on the company’s board and then affect change on the company from the inside.
Sherlund’s Suggestions About Microsoft’s Capital
The Nomura analyst then proceeded to provide some possibilities for what ValueAct might suggest if it decided to make a case for returning value to shareholders. He said one problem in the tech sector is that companies like Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL) are reluctant to part with their extra cash because they want to have it available in case they have an opportunity to buy growth. Also a large portion of these companies’ cash is overseas.
However, he said there are some things Microsoft could do to return value to shareholders. He said about $66 billion of Microsoft’s cash is offshore and the company can’t bring it back. Some companies borrow money to fund dividends and their U.S. operations, but he believes Microsoft specifically could buy back 20 percent of its stock.
He also suggested that the company provide tax on a go-forward basis on its foreign source income and pay that to shareholders. According to Sherlund, Microsoft Corporation (NASDAQ:MSFT) could bring back an extra $8 billion a year and free that up for shareholders. Options might include doubling the dividend from 3 percent to 6 percent.
Microsoft And IBM
Sherlund also drew some parallels between Microsoft now and International Business Machines Corp. (NYSE:IBM) when Lou Gerstner took the helm. Under Gerstner, the company’s dividend and share repurchasing plan both increased. Although he doesn’t think Ballmer is likely to follow a capital return plan like Gerstner’s plan, he did note one early similarity between IBM when it started to turn things around and Microsoft now.
He said that like IBM, Microsoft Corporation (NASDAQ:MSFT) focused on services when it reorganized. He notes that investors don’t like the term “devices” because it doesn’t imply a long-term revenue stream like the term “services” does. He believes that with this refocus on services at Microsoft, we could be moving into a pivotal time at Microsoft that will end up being similar to what we saw at International Business Machines Corp. (NYSE:IBM) in the past.