Ballmer Exit Another Sign Of Growing Influence Of Activist Investors

It increasingly looks like Steve Ballmer’s decision to quit as Microsoft ’s chief executive by announcing he would retire within the next year represents another big scalp for activist investors who have taken the financial markets by storm.

Reporting about what happened in Redmond, Wash., last week suggests that Jeffrey Ubben and his ValueAct hedge fund played a fundamental role in the events that have led to a management change at the top of Microsoft. The Seattle Times reported that ValueAct pressure may have played a role in Ballmer leaving, citing Nomura Securities analyst Rick Sherlund, who said that the board of directors was threatened by a potential proxy fight from ValueAct that would have put a spotlight on a decade of problems at the software giant. Just prior to Ballmer’s announcement, Sherlund, who has followed Microsoft for years, had upgraded his rating on Microsoft and suggested investors buy the stock because of his belief that ValueAct would gain a Microsoft’s board seat and bring change to the company’s management.

Kara Swisher, the influential tech writer at All Things Digital, has followed up with reporting that cites sources close to the situation, saying that concerns at the board level about pressure from ValueAct was “critical” to the decision that Ballmer exit the CEO position. Members of Microsoft’s board were reportedly worried that ValueAct would get a board seat if Ballmer remained CEO and that a proxy fight would bring too much public attention to Ballmer’s track record at Microsoft.

Ballmer has denied that ValueAct played a role in his decision to step down from the CEO position, but Swisher reports that sources told her that was bluster.

The shake up at Microsoft comes amid an activist investor wave that has swept through financial markets and has been particularly strong in the technology sector, which has long resisted outside shareholder interference. Dan Loeb, the activist hedge fund billionaire, sparked serious changes at Internet giant Yahoo , orchestrating the removal of Scott Thompson as CEO and the hiring of Marissa Mayer as his replacement. The hedge fund of another billionaire, Paul Singer, has reportedly been able to recommend two new board members to the board of NetApp as part of its efforts to get the company to make various changes. And billionaire investor Carl Icahn, who has been at the forefront of the battle being waged by some Dell shareholders to block Michael Dell’s buyout of the PC maker, has excited investors by taking a stake in Apple and pressing for a big stock buyback.

ValueAct’s role in Ballmer’s exit and Icahn’s impact on Apple’s stock suggest that activist investors can wage their battles against bigger companies even though their percentage ownership of the stock outstanding of the companies they are targeting is limited. With ever increasing war chests activist investors are bringing their brand of investing to larger companies that have previously seemed immune to their efforts because of their big market capitalizations, which makes it tougher for activists to throw their weight around.

ValueAct disclosed in April that it had taken a $2 billion position in Microsoft’s stock—a big investment for a single hedge fund that still only represented about 1% of Microsoft’s total stock outstanding. But it increasingly seemed like ValueAct had been able to galvanize support for its run at shaking things up at Microsoft from other shareholders that had seen the company’s market capitalization shrink in recent years. In July, Reuters reported that Microsoft board members had held discussions with the hedge fund about its demand to secure a board seat and ValueActs’ concerns about a lack of succession planning at the top of the management structure. Now, the activist hedge fund appears to have played a role in the exit of Ballmer, a CEO who for years seemed permanently ensconced at the top of Microsoft even though he could not seem to right the Microsoft ship. At one point, Ballmer had planned to stay on till 2017. It looks like a victory for the activists.