ValueAct Cleared to Unleash the Dogs of War on Microsoft (MSFT)

ValueAct Capital is preparing to turn the heat up on Microsoft Corp (NASDAQ: MSFT), if a recent filing is any sign.

It was disclosed today that ValueAct has been granted early FTC antitrust clearance for a transaction involving Microsoft. While it is unclear exactly what type of action was being cleared, it is well known that ValueAct has established a $2 billion position in Microsoft and they are not exactly happy with the way things are going.

ValueAct's Jeff Ubben recently said Microsoft is a "compelling" investment and its products like Azure, SharePoint, and Lync have "plenty of room to grow." He thinks Microsoft might take the title of 'World's Largest Company' within three to five years.

Nomura analyst Rick Sherlund said today's FTC clearance could have been required if ValueAct intends to be an activist, given the size of their investment.

"Based on past activities of ValueAct with some other companies they have been involved in, we have been of the view that ValueAct is likely approaching Microsoft’s largest shareholders and may be gaining their support for a Board seat," Sherlund comments. " If they were to ask for a seat and Microsoft's Board were to decline, then the process available to them would be to file this summer for inclusion in the proxy statement to ask for a seat to replace an existing Board member. To advocate for change to enhance shareholder value, our view is that ValueAct might be best able to do this quietly from the inside and appeal to independent directors rather than having to work from the outside in full public view, which has not been the activism style of ValueAct historically."

Sherlund said the FTC news is good for the stock "as this summer likely holds some corporate drama as ValueAct advocates for changes, and we think a battle for a Board seat likely heats up and details spills into public view."

In addition to the ValueAct news, Sherlund notes that Microsoft shares could get a flood of buying from the upcoming Russell re-balance.

"We expect Russell will increase the float for MSFT from 90% to 100% due to a sell down in stakes by Mr. Gates and Mr. Ballmer based on a July 2012 10K filling, increasing its weight from 1.58% to 1.75% in the Russell 1000 during the Russell Reconstitution," the analyst said. "As a result, we expect Russell index managers will need to buy 21.727 MM shares or $758 MM of MSFT (or 0.43 times the ADV) at the close on June 28, 2013, and expect the net buy in MSFT would make it the third largest name to buy in terms of $value during the reconstitution."

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