Microsoft-Nokia Deal Timing Leaves ValueAct Fewer Options

The timing of Microsoft Corp.’s agreement to acquire Nokia Oyj’s handset unit leaves activist shareholder ValueAct Holdings LP with fewer options to oppose a transaction some investors don’t favor, according to Rick Sherlund, an analyst at Nomura Holdings Inc.

ValueAct last week won an agreement from the world’s largest software maker that would give it a seat on the company’s board next year, along with guaranteed regular meetings between ValueAct’s President Mason Morfit and “selected Microsoft directors and management.”

The agreement was seen by analysts as a concession from Microsoft. In return, ValueAct said it wouldn’t pursue or participate in a proxy contest. ValueAct Chief Executive Officer Jeffrey Ubben has praised Microsoft’s business software and Internet-based cloud services, and a person with knowledge of the matter has said the shareholder wants Microsoft to focus on those products rather than consumer technology.

Microsoft’s announcement this week that it agreed to buy Nokia’s handset unit and license its patents for 5.44 billion euros ($7.2 billion) moves the company in more of a consumer direction.

Yet “now that ValueAct has entered its standstill agreement, it is not clear what alternatives ValueAct may have to respond to shareholder dissatisfaction with the Nokia deal,” Sherlund wrote in a note yesterday.

A share decline of as much as 6.3 percent following the unveiling of the transaction will result in ValueAct pushing for changes including increasing dividend payments and share buybacks, Sherlund wrote.

No Knowledge

Microsoft General Counsel Brad Smith, when asked yesterday on a conference call with investors whether ValueAct knew about the Nokia discussions before signing the cooperation pact, said, “The answer is no. You would not expect the company to disclose material, non-public information to an entity that doesn’t have an appropriate non-disclosure agreement.”

Representatives for ValueAct didn’t return calls for comment on the Microsoft-Nokia deal. Sherlund didn’t respond to requests for comment.

Microsoft Chief Financial Officer Amy Hood said in an interview yesterday that she looks forward to talking to ValueAct’s Morfit and that any conversations would remain private.

Microsoft shares fell 4.6 percent to $31.88 at the close in New York, after earlier trading as low as $31.29.

More Cash

ValueAct in April had disclosed a stake of about $1.9 billion in Microsoft. The investor has been seeking a return of more cash to shareholders, according to a person with knowledge of the matter. Microsoft has $77 billion in cash and investments.

Last week, Redmond, Washington-based Microsoft said ValueAct has the option of having Morfit become a director beginning at the first quarterly board meeting of 2014. The announcement came at a deadline for proxy contests and other matters for the company’s November shareholder meeting, and during a period of drastic change for Microsoft. The company said last month that CEO Steve Ballmer would be retiring within 12 months.

Microsoft’s board has established a search committee to seek a new CEO. If Morfit joins as a director next year, he could become involved in the search if a successor to Ballmer hasn’t yet been found.

Microsoft said ValueAct owns about 0.8 percent of its shares outstanding and has $12 billion under management.

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