Reuters is reporting that three of Microsoft's top 20 shareholders, representing 5% of the outstanding shares, want Bill Gates to resign as chairman.
REPORT: MSFT investors want Gates out as chairman
"If both Gates and Ballmer are out, and better capital allocators are in, Microsoft's stock will hit $40 within the next several months," predicts Dan Ferris, investment analyst at Stansberry & Associates Investment Research. "If Gates announces his resignation, the stock will rally."
The dissatisfied shareholders are most probably upset that Gates would likely stay the course that he and Ballmer have established by pushing for a Ballmer clone to replace his college buddy.
Since Gates stepped down as CEO and turned the reins over to Ballmer, Microsoft has stood up 16 businesses that do a billion dollars plus in annual revenue, including a handful are growing at double digit rates.
And under the Gates-Ballmer regime, Microsoft continues to rake in exorbitant profit margins with its entrenched Windows and Office software businesses, which require very little capital investment. Selling software licenses doesn't burn through cash like, say, building cars or jetliners.
The company had record revenues topping $73 billion in its last fiscal year, and has stockpiled nearly $70 billion in foreign securities, which it can quickly turn into cash.
But its share price has been on a plateau for over a decade. That's because for a giant corporation that generates a mountain of free cash flow Microsoft is viewed by many on Wall Street as being too stingy in rewarding shareholders.
Free cash flow is the money from core operations that's left over after it's reinvested to maintain and grow the business.
Titans like Coca Cola, ! Colgate Palmolive and Johnson & Johnson that throw off a lot of free cash flow on a consistent basis typically pay their fair share of U.S. taxes and send sometimes as much as 60% or 70% of free cash flow back to shareholders in the form of dividends.
Even with a recent boost in dividends, Microsoft still will convert only about 40% of free cash into dividends.
The shareholders who want Gates to follow Ballmer out the door very likely view poor capital allocation as one of Microsoft's primary problems. Ballmer has spent spent $21.7 billion to acquire aQuantive, Skype and Nokia, and one of the shareholders' big concerns has to be that Gates will push to bring in a Ballmer clone.
"If good capital allocators take over the top two spots at Microsoft, the whole world will wish it listened to me one of the few dozen times I recommended the stock since I first started covering it in 2006," says Ferris.
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