ValueAct Holdings LP President Mason Morfit, the investor set to join Microsoft Corp. (MSFT)’s board as it prepares to make Satya Nadella chief executive officer, will seek another break with tradition: how the company sells its flagship products.
Morfit, 38, and ValueAct want the world’s largest software maker to reduce its focus on Windows, the operating system that underlies most of the company’s offerings, according to people familiar with the matter who asked not to be identified because the information is private. For two decades, Microsoft has focused on selling applications and server software designed to work specifically for Windows.
Now ValueAct wants Microsoft to accelerate efforts to unchain products and services from Windows so that they can be more widely adopted on smartphones and tablets. Microsoft programs like Office, which typically run on Windows, could then also be used on Apple Inc. (AAPL) and Samsung Electronics Co. gadgets that have other operating systems, the people said. The moves are intended to reinvigorate growth at a company that’s struggled to adapt to the rise of mobile devices, away from the shrinking personal computing arena.
Morfit also wants to emphasize enterprise and cloud businesses and push Microsoft to look at jettisoning or scaling back hardware and consumer products such as the Xbox game console, which carry expensive marketing and manufacturing costs, the people said.
Morfit plans to push this agenda behind the scenes, using persuasion and data, said the people. The approach is part of ValueAct’s activist playbook, which favors quiet influencing over poison penmanship, using data to make tough points and a long-term commitment to coax a company to change, said people who have worked with Morfit and an examination of ValueAct’s public statements and past activist campaigns.
“We have found over time that the most effective way to get what you want accomplished is behind the scenes,” Morfit said in a 2012 lecture series at Stanford University’s Rock Center for Corporate Governance. “For us it’s just a truism that people will do what you want if they like you and if you haven’t publicly humiliated them.”
The approach, which contrasts with more outspoken activists such as Carl Icahn and Bill Ackman, has helped change the direction of companies from Valeant Pharmaceuticals International Inc. to Sara Lee Corp. Last year, ValueAct helped get industrial equipment maker Gardner Denver Inc. to sell itself to KKR & Co. for about $3.7 billion. In 2012, it attained board seats with Adobe Systems Inc. and Motorola Solutions Inc.
ValueAct representatives declined to comment.
At Microsoft, Morfit will be walking into a company in flux. The Redmond, Washington-based software maker is preparing to replace CEO Steve Ballmer with cloud and enterprise chief Nadella, people familiar with the matter have said. The board is also discussing appointing lead independent director John Thompson as chairman, a role that co-founder Bill Gates currently holds, the people have said.
The software maker is also integrating a $7.2 billion acquisition of Nokia Oyj’s handset unit as it tries to refashion itself into a hardware and cloud services company.
Morfit and ValueAct aren’t shying from Microsoft’s challenges. With just 0.81 percent of the software maker’s stock, the San Francisco-based fund garnered enough institutional shareholder backing last year to gain a board seat and regular confidential briefings with executives and directors. In a privately negotiated standstill, Microsoft’s board chose Morfit over ValueAct CEO Jeffrey Ubben, 52, to join its ranks this March.
While it’s unclear how Nadella and Morfit will ultimately work together, some of the areas that ValueAct plans to emphasize are directly within Nadella’s expertise of enterprise technology. Nadella helped build up Microsoft’s cloud services business. And the executive isn’t averse to breaking from tradition and has internally advocated that his team spend more time looking at and learning from nimble startups.
Microsoft essentially used to take “into account their ambitions first and wishes of shareholders second,” said Tony Ursillo, an analyst at Loomis Sayles & Co. in Boston, which manages almost $200 billion, including Microsoft shares. Now the company may have to change to be more responsive, said Joe Esposito, another analyst who follows Microsoft at Loomis.
“Microsoft’s board of directors and management team welcome the perspectives of shareholders,” Microsoft said in an e-mailed statement last week. “We are committed to enhancing value for all shareholders, and will continue to take actions that we believe will enable us to achieve this objective.”
Garrison Mason Morfit -- who follows a family tradition of using his middle name -- grew up in Washington D.C., as well as Jakarta, Indonesia, and New Delhi, India, where his father was posted in the U.S. foreign service.
Microsoft will be Morfit’s sixth and ValueAct’s 43rd public company board seat since it began in 2001. Morfit has been at the firm since year one, after the Princeton University grad left a job as a health-care analyst at Credit Suisse First Boston. Morfit joined his first board at age 29, and Microsoft will be his first directorship at a computer-technology company, with the others in health care and life sciences.
“I’ve always been quite a bit younger than the other people on the board, with a much less impressive resume than the other people on the board,” Morfit said in one of his three lectures at Stanford, which are posted on YouTube. “The challenge is how do you influence a room of people that are much more experienced and older than you? And the answer is not to come in guns blazing like you know all the answers and you’re so smart and they’re so dumb.”
Morfit was key in ValueAct’s biggest success to-date, Valeant Pharmaceuticals (VRX), which was pursuing long-shot disease cures when the fund invested in 2007. Morfit helped convince the board to turn to less sexy, higher-return branded generics and recruit a new CEO, Mike Pearson, as well as overhaul compensation to reward shareholder outperformance. It was his second time on a board.
Valeant Pharmaceuticals has since grown from a $1.4 billion company into a $45 billion drugmaker that last year said it would purchase Bausch & Lomb Holdings Inc. for $8.7 billion. It’s the one corporate board on which Morfit remains, alongside Chairman and CEO Pearson.
“He’s a student of what makes a CEO good and not so good and so I think he has some perspectives on that, but more important he’s in it for the long term,” Pearson said in an interview. “From my standpoint the litmus test is ‘would I invest my money in Microsoft if Mason’s on the board?’ Absolutely.”
Morfit has also been on the public company boards of Solexa Inc., Advanced Medical Optics Inc., Immucor Corp. and C.R. Bard Inc.
ValueAct hasn’t always favored private persuasion and previously took on targets more aggressively and publicly. That changed in 2006 when the firm mounted a bitter fight for board seats at data-management company Axciom Inc., and a campaign to force Novartis AG (NOVN) to up an offer for biotechnology firm Chiron Corp. The experiences triggered a shift toward building credibility with big institutional fund managers, rather than waging media campaigns and courting other hedge funds, Morfit said in his Stanford lectures.
With Microsoft, Morfit’s campaign began when Ubben revealed ValueAct’s stake in the company at a conference last April -- a position the fund took more than two years after being approached by institutional shareholders unhappy with Microsoft’s management, capital structure and strategy.
ValueAct has said little publicly on Microsoft, all of it positive. At the April conference, Ubben said within five years, Microsoft would be discussed as the “largest cloud-computing company in the world.”
Morfit, who lives with his wife and three children in San Francisco where he also plays guitar in a rock band called Birdseed, then spent last summer flying around the world meeting Microsoft’s directors, said people familiar with the efforts.
Last August, Ballmer announced he would retire within a year. That was a curve ball for ValueAct, said two of the people. It resulted in a staredown over whether the activist would mount a proxy contest for a board seat or the board would grant it, said the people.
On Aug. 30, the last business day for Microsoft proxy matters, a deal was unveiled adding Morfit to the board in the first quarter of 2014 and to consult with him in the interim.
The next day, ValueAct got hit with another shock when Microsoft informed the fund that it was acquiring Nokia’s handset business, increasing its bet on a hardware focus that the investor didn’t agree with, the people said.
ValueAct was upset, the people said. Yet the firm reasoned a new CEO and strategic changes were more important than the Nokia deal, said the people. And it won’t be the first time Morfit faces difficult situations in a boardroom.
“There were some very tense moments and some very human interactions,” Morfit said in one of his Stanford lectures of being an activist investor. “Let’s just say I’ve seen a grown man cry quite a few times.”