Hedge fund manager Jeffrey Ubben is the methodical type. He typically follows a company for a year or more before he invests a penny. But in February one of his partners, after a dinner with Microsoft executives at a conference, suggested looking at the software giant. Ubben got so excited that within two months he bought $2 billion in shares. Since then he’s taken his pitch public. In his view Microsoft’s software is the electronic version of plumbing: It isn’t glamorous, but it’s essential to hundreds of millions of people who use a computer daily. Prominent fund manager Whitney Tilson calls Ubben’s argument a “very compelling contrarian take.”
Ubben, 52, is an activist investor, with an approach built on the Warren Buffett value philosophy. Ubben, who started as an analyst under legendary Fidelity fund manager Peter Lynch, launched his firm ValueAct in 2001. Today it manages $12 billion.
It’s not Ubben’s first time in the public eye — he and his partners have been involved in 20 management changes and, for a time, he was chairman of Martha Stewart Living Omnimedia — but his Microsoft campaign has propelled him to new prominence. People familiar with the situation say Ubben played a role in CEO Steve Ballmer’s plans to depart, contacting other large shareholders and rallying support for a management change. (Ubben and Microsoft declined to comment on this point.)
Plenty of investors have lost money trying to call the bottom in Microsoft’s stock. But Ubben’s entry has coincided with a revival, as the shares have risen 10% since he announced his position in April. Perhaps that’s partly because he has been able to convince others that the company, which has been treading water for more than a decade, can be fixed. With other investors on his side, he’ll probably be able to push through more changes. Microsoft agreed in August to give ValueAct a board seat.
Unlike many activists, Ubben prefers to work mostly behind the scenes. He rarely releases letters denouncing a target’s management or makes his fights public. He usually gives management a year before pushing for new executives, he says, which has made it easier for him to be heard.
The results have been superb. A FactSet study found that the shares of companies in which a ValueAct partner joins the board outperform the market by an average 14% over the next two years. Ubben’s fund has averaged 17% annual returns since it was launched 12 years ago, vs. just under 4% for the S&P 500 in the same time.
Ubben seeks a few good businesses (as of midyear, his fund held 14 stocks) that sell products, such as pharmaceuticals, that are essential to the customer and often have to be bought again and again. He gravitates to companies whose managements have alienated shareholders. “One thing we agree with Buffett about is great businesses,” he says. “Managements can change, but it’s really hard to make over a mediocre business.” He views what he does as superior to private equity. “I have the moral authority, because I am a patient and successful investor,” he says. “So I can control a company without owning all of it.” Ubben has a low-key swagger. He recently proclaimed that Microsoft’s shares will outperform Apple’s.
ValueAct’s second-largest position, after Microsoft, is Motorola Solutions. Most investors were enamored of Motorola’s handset business when the company split in two in 2011. But just as Buffett might have, Ubben preferred the dowdier business with the strong competitive “moat.” He bought shares of Solutions, which makes police radios and scanners. Despite tight municipal budgets, the company’s revenue grew 11% last year. “It’s an extremely risk-averse customer base,” says Ubben. “They’re just printing money with a 90% market share.”
Ubben also owns shares of MSCI, which creates software and indexes that allow money managers to track their performance (which is integral to how much they are paid). Ubben likes that its main product is relatively cheap but hugely important for its Wall Street customers.
Microsoft fits Ubben’s mold as well. Nearly 70% of the company’s operating profits come from Office and other software it sells to businesses. Ubben says the cost of those sales is very low. Ubben argues that Microsoft’s future is selling software to businesses, which it should aim to do on a subscription model. As software moves to the cloud, that will become even easier. Microsoft, he says, should better cultivate enterprise clients and innovate, so it “can get out of the product cycle business.” Ubben’s thesis received support in late October when Microsoft posted better-than-expected earnings on the strength of enterprise sales.
His emphasis on this aspect of Microsoft’s business — the only part he’ll publicly comment on — has led some to conclude that Ubben thinks that Microsoft’s $7 billion deal to buy Nokia’s phone unit is ill-advised and that Microsoft needs to stop spending billions to preserve its Windows market share with consumers.
Detractors say such a prescription won’t work. Just 40% of the world’s 1.7 billion computers are owned by corporations, according to research firm IDC. If Microsoft exits the consumer and mobile businesses, it will shrink. Ubben disagrees. Even after its recent run, he points out, Microsoft trades at a 13 P/E, a discount to rivals IBM, SAP, and others. Says Ubben: “People are too focused on the negatives.”
This story is from the November 18, 2013 issue of Fortune.
