With Microsoft CEO Steve Ballmer announcing today he will retire within the next 12 months, investors and analysts are now talking about who should take his place, with some saying an outsider is needed to step in and shake things up at the world’s largest software company.
“The world has moved faster that Microsoft's licensed software business model could respond. Apple, Google, and Amazon have become enterprise suppliers. Salesforce.com and Amazon are accelerating the shift to cloud computing. Dropbox has grown from zero to 175 million users in five years. So even as Microsoft's revenue more than tripled to $73 billion in 2012, things didn't feel good,” said Ted Schadler of Forrester Research. “It's a good decision for Steve to step down and pass control to someone else, probably an outsider.”
Ballmer, who joined Microsoft in 1980 as its 30th employees and succeeded co-founder Bill Gates as CEO in 2000, said in an email to employees today he would have preferred to hold off on his retirement until the transformation to a “devices and services company” was further along. Ballmer announced that shift, to a company that integrates software and hardware like rivals Apple and Google, as part of a company-wide restructuring last month intended to make the company faster, more effective and more competitive amid waning demand for the PCs that have driven its software gains.
The Redmond, Washington-based company now needs “a CEO who will be here longer term for this new direction," Ballmer, 57, said today. "There is never a perfect time for this type of transition, but now is the right time."
Investors applauded Ballmer’s decision, sending the shares soaring in early morning trading -- and initially adding almost $1 billion to Ballmer's Microsoft holdings (with is net worth at about $17 billion.) Microsoft shareholders have had a negative total return of more than 17%, with the stock down over 35% during Ballmer’s regime, according to data from FactSet. As Forbes reporter Steve Schaefer noted, “while some of that decline can be attributed to the tech sector’s rapid descent from the heights of the dot-com bubble, Microsoft has frustrated investors for years with its inability to translate a massive cash generation machine — revenue and profits have grown enormously — into stock market performance.”
Microsoft rose 7.3 percent, or $2.37, to close at $34.76 in Nasdaq trading. The shares climbed as much as 10 percent on the news.
“If the successor is an internal candidate then we believe the scope for serious deviation from the current course is likely limited, given the transformation plan involves some profound shifts in sharing more business group functions and unified departments,” Raimo Lenschow of Barclays Capital said in a note to investors. “If the successor is external, then there could be greater opportunity to evaluate other significant strategic changes in the business structure or to more aggressively engage in cost savings. However, this approach would also be higher risk for the company as the current transformation would already be under way.”
Microsoft investor Michael Obuchowski, a portfolio manager at North Shore Asset Management LLC in Cold Spring Harbor, New York, applauded Ballmer for his early work in simplifying Microsoft’s operations in recent years but said the company is lacking a comprehensive strategy. His pick for a replacement: Google Chairman Eric Schmidt, who has the necessary background in “old-style software and hardware” that Microsoft was built on but also understands how more recent creative and innovative big tech companies work.
Overwhelming Ego
“He ran a large fast-growing complex firm with a number of division doing things more or less similar to Microsoft - or at least having to deal and motivate both software and hardware guys. In addition, he was able to keep his ego in check and smoothly shift the company to the next generation when the time came while remaining an important adviser. Such a cross generational thing is not an easy feat,” Obuchowski said. “Steve Ballmer is not leaving an heir apparent people there - his ego overwhelmed pretty much everybody else.”
The search for a successor is being led by a special committee of Microsoft's board, and chaired by John Thompson, the board’s lead independent director. It includes Microsoft's Chairman Bill Gates, Chairman of the Audit Committee Chuck Noski and Chairman of the Compensation Committee Steve Luczo, who is CEO of disk driver maker Seagate. The committee is working with recruitment firm Heidrick & Struggles and Microsoft said it "will consider both external and internal candidates."
Longtime PC analyst Roger Kay says Microsoft has few internal choices because Ballmer drove many promising executives away, including Steven Sinofsky, Craig Mundie, Ray Ozzie, Bill Veghte, Jeff Raikes, Vic Gundotra, Kevin Johnson, Stephen Elop, Robbie Bach, J Allard, Chris Liddell and Bob Muglia. "Ballmer is a guy with a temper, curt with subordinates who are insubordinate," Kay said. "By forcing out the best people in the most senior positions, he not only failed to groom a successor, but guaranteed that no possible heir to the throne could come from inside the company."
“Ballmer’s announcement of his retirement is a major event and turning of the page for Microsoft. But a more critical event will be the hiring of his replacement because that replacement will send the signal of what sort of changes, if any, in the current strategy will take place," said David Cearley, a Gartner fellow and vice president. Microsoft's "blind spot" has been to devote its time and attention to "incremental advancements" in its existing products and services rather than making new bold bets in new areas of innovation.
"If the board is ultimately looking for execute on the devices and services strategy put in place over past last year, then we’ll likely see someone internally tapped for the position though there's not an obvious internal candidate that’s the obvious,” he said. “If they bring in someone from outside of Microsoft, any CEO worth having is going to want to put their own vision and impression into Microsoft’s vision and organization. I think what Microsoft needs to do is look at a CEO that can really increase Microsoft’s focus on driving disruption and driving innovation in the marketplace...An external party that has a good vision of the industry as well as good business capabilities may be the right choice.”
The new CEO could also face an IBM or GE "moment," adds Forrester's Schadler. "Keep the company together or break it apart? Lou Gerstner kept IBM together and that decision had paid off handsomely. Then again, IBM relentlessly focused on a single enterprise market, shedding its PC and other low-margin businesses...Tough decisions for Steve's successor."
