Who Should Lead Microsoft Now? 5 Answers From Investing Experts

By Josh Wolonick  AUG 29, 2013 11:50 AM

Minyanville writers weigh in on the future of the tech giant.

 


Last Friday, Microsoft (NASDAQ:MSFT) announced that CEO Steve Ballmer would be stepping down as the head of the company within the next 12 months. That one-year timetable has led many to believe he was forced out by the company's board.

Microsoft has been troubled over the last few years, with the decline in the PC market, the rise of Apple (NASDAQ:AAPL), the era of the smartphone, and the disappointing debut of the company's Surface tablet. Microsoft obviously has a lot riding on the choice of Ballmer's successor. High-profile names being tossed around in the media as potential candidates include Facebook (NASDAQ:FB) COO Sheryl Sandberg, Juniper Networks (NYSE:JNPR) CEO Kevin Johnson, Nokia (NYSE:NOK) CEO Stephen Elop, and Ed Breen, former CEO of Tyco (NYSE:TYC).

Amid the confusion, we asked five Minyanville writers to weigh in on the future of Microsoft.


Microsoft Should Look to IBM's Example
By Michael Comeau


So who should replace Steve Ballmer at Microsoft? I actually can't come up with a single name.

But there is a prototype for a Microsoft turnaround -- IBM (NYSE:IBM) in the 1990s under Lou Gerstner, who brought an unemotional, outsider's view to a company entrenched in its own staid culture.

Mr. Gerstner changed IBM compensation and management policies to reduce infighting and interdivision rivalry, and killed unprofitable product lines like the OS/2 operating system. He also set IBM on a fresh path as a highly profitable, acquisitions-driven IT services company, which, while not particularly sexy, has worked out pretty well for shareholders over the long term.

This new way of doing business also resulted in a brilliant strategic move following Mr. Gerstner's departure -- the sale of IBM's PC business to Lenovo (OTCMKTS:LNVGY) in 2005. And that's what Microsoft needs -- an outsider who can transform its culture from the inside out to forge a new path forward.

Michael Comeau edits Minyanville's Buzz & Banter and is also a regular columnist on Minyanville.com, focusing on technology and consumer stocks. Read more of his work for Minyanville, here.


Microsoft Isn't Broken, and It Doesn't Want a Savior
By Andre Mouton

The most important thing Microsoft's new CEO can do is avoid trying to do too much. Large changes to the corporate culture will be nearly impossible. Microsoft has 99,000 employees, many of whom have spent their entire careers in Redmond.  With countless product lines and entrenched camps everywhere, the new chief executive could spend years fighting the company's legendary inertia, and still get nowhere.

Cutting-edge innovation is probably off the table as well. Microsoft has to contend with a large ecosystem of manufacturers, and an even more diverse customer base. Unlike the smartphone world where one size (or maybe two) fits all, PCs have to satisfy a wide range of needs, some of them legacy. Doing many things well often means doing nothing great. Microsoft has never been a paragon of creativity, but its conservative, wide-foundation approach works well in certain markets -- something that is often overlooked by those who value innovation for innovation's sake.

Microsoft isn't broken, and it doesn't want a savior. The new CEO should be someone adaptable, who can work with his or her company's limitations, and who can strike a balance between the desire for change and the need for stability.

André Mouton is an independent investor who cut his teeth in the dot-com crash and chewed his lip in the financial crisis. He is a former writer for Offbeat Magazine in New Orleans and a touring (but not itinerant) musician, who now lives in New York. Read more of his work for Minyanville, here.


Go Back to the Future With Bill Gates
By Justin Sharon


Who to take over at Microsoft? As a wild-card pick, the company could do worse than choose that clairvoyant Nomura researcher who presciently upgraded the key Dow (INDEXDJX:.DJI) component 24 hours before its stock surged 7% on Steve Ballmer's exit. Such foresight is a rare commodity among Wall Street's army of after-the-fact ditto-heads. Indeed several former members of the sell side community have profitably transitioned to industries they once covered. These include longtime top-ranked auto analyst Steve Girsky, now an influential executive at General Motors (NYSE:GM).

More realistically, the company should go with a known quantity, for the task ahead is a formidable one. Microsoft, even in its weakened state, does boast incredible assets. Its balance sheet is pristine, a $284 billion behemoth that generates $80 billion in revenue. Cloud services, servers, and tools all offer considerable promise even as Windows inexorably slows. And Xbox 360 is still a cash cow.

That said, whoever takes the helm has his or her work cut out. Microsoft is entering middle age patently ill-equipped for our Web-based, post-PC era after enduring multiple missteps in mobile and tablets. The law of large numbers currently bedeviling many erstwhile technology titans will make it especially hard to effect meaningful change absent something dramatic such as a breakup.

Step forward, Bill Gates. The company co-founder knows his baby inside out, remains its largest shareholder, and was clearly influential in ousting his unloved successor. Gates must take a measure of blame for the stock being essentially dead money for a decade, so his return shouldn't be seen as a panacea. Yet he did accurately foresee the Internet threat, and it is surely no coincidence that shares topped out December 30, 1999 -- a mere 16 days before the Harvard dropout essentially abandoned his day job for full-time philanthropy.  

He is still only 57, which may be Methuselah in tech terms but provides ample time for a dramatic last hurrah. And who says you can't go home again?  The history of corporate America is replete with prodigal sons returning, most recently with A.G. Lafley at fellow blue chip Procter & Gamble (NYSE:PG). Occasionally it ends in tears (see: Lay, Kenneth at Enron), but boomeranging back often succeeds spectacularly -- witness the inspiring examples of Steve Jobs at Apple and Starbucks' (NASDAQ:SBUX) Howard Schulz.

Gates brings instant credibility, and his comeback would also provide an immediate morale boost on the Redmond, Washington, campus. He can then begin the process of grooming a long-term successor. Here, Tony Bates ultimately looks like the in-house standout. The 46-yearold former Skype CEO embodies the continuity and promoting-from-within ethos Microsoft has historically prized. However, he also has crucial outside executive experience gleaned at Cisco Systems (NASDAQ:CSCO), and as such, is able to offer badly-needed new ideas.

As we saw with the unfortunate example of beer-swilling ex-Groupon (NASDAQ:GRPN) chief Andrew Mason, Silicon Valley's boy wonders sometimes need adult supervision. No one can better provide that than Bill Gates, who positively revels in being boring. He could teach Bates the ropes before handing over his multibillion-dollar creation on a permanent basis a couple of years hence. The trick for the software legend will of course be learning to let go at the right time, without becoming a meddling Svengali type hovering in the background in the manner of Banquo's ghost.

Justin Sharon authors Minyanville's stock upgrades and downgrades articles every morning. He has extensive experience on Wall Street, most recently at the Private Client unit of Merrill Lynch. A 12-year spell in its research department encompassed the eras of Blodget, boom, bust, and Bank of America. Read more of his work for Minyanville, here.


Someone Quieter, Someone Saner
By Vincent Trivett


First, let's just point out the bittersweet situation for Ballmer on Friday. He became significantly richer because the market swiftly decided that whoever runs Microsoft next will be better than him.

The latest earnings blowup aside, we have to acknowledge that Ballmer did in fact run Microsoft as a very profitable company, and even though the stock has barely moved since 2000, it delivers a lot of cash to shareholders and still has enough to do copious R&D.

But the problem, of course, is keeping that up. The big cash cows have free alternatives. Essentially, Microsoft has made a ton of money convincing businesses that they can't get any work done without it. And I can't think of any product of Microsoft that didn't have some kind of precursor.

Just anecdotally, I can say that newer businesses that I've seen and worked with over the years balk at paying massive licensing fees in exchange for software with free alternatives. True, Excel is amazing, but Word? Google Docs. Windows Server? It's a hard sell when you can install Linux servers on as many machines as you want for no licensing fees. Outlook? Some people are just used to it, but there is no reason for Outlook to exist. 

Windows is a big money maker, but the reality is that people just don't buy it. Very few people, including security-conscious (more on that in a minute) companies ever bother to update their operating systems. They get a new one when they buy a new computer.

Some folks are in the habit of using Windows, but Windows 8 changed all that. I recently got a sweet new laptop with a touchscreen and Windows 8. I liked it for a few minutes before it started to get really irritating. I installed the free option, Linux, that very day and sped up the computer's performance drastically. Of course, I am a geek. Non-geeks are going to stick with Windows unless they go join the Apple family. But if people aren't buying Windows licenses, Microsoft's fortune is tied to the slumping PC industry. Just last quarter, Windows sales were down 6% on the quarter.

So who can blame Microsoft for diversifying into all of these crazy things like web services that nobody needs? It was worth a try. And making their own hardware was a fine idea. They know that they lose customers because using Windows on cheap hardware is no picnic. But if they want to sell anything, they had to deal with suppliers' shortcomings, even bending on hardware recommendations to help them unload aging products. And of course, everyone has awful malware on their systems, too, because of Microsoft's strange insistence of patching exploits on the second Tuesday of the month rather than ASAP. This gives exploiters up to a month of intrusion into the millions of computers and servers running Windows. And since so many people don't even download the patches, everyone can examine the patches and exploit the users who didn't download the update. Making their own hardware to make the Windows experience good is definitely a plus.

But the direction Microsoft has been in for a while with the web services, and the irretrievable bomb that is the Surface, isn't working. It reminds me of a guy at a carnival game who blows $100 trying to knock down some pins, and figures that if he quits now, he wasted that money, so he sinks the rest of his savings into acquiring a $15 plush toy. That plush toy is Bing's sliver of traffic (much due to its privileged position in Win 8). It cost Microsoft about $3 billion. And who can forget the near $1 billion write down on the Surface RT, which nobody seems to want. Xbox is not a huge business for them, but the much nicer, cheaper PlayStation (NYSE:SNE) that doesn't watch you in the privacy of your home seems to be giving them a run for their money.

This is the biggest challenge that Microsoft's next CEO faces. You can't just tell shareholders that you give up trying to be a major player on the web, mobile, hardware, e-readers, tablets, etc after sinking so much of their money into it. What they are good at, obviously, is enterprise. This is what the folks at Venture Act, a major shareholder wants them to focus on. But as I said earlier, their competitive advantage in enterprise software is eroding. What to do?

I'd say that it's probably smart to try and sell the losers like Bing. So promoting their cloud and enterprise head Satya Nadella is one way to go. I'd wager that Venture Act and company would be pleased. I hope they don't double down and go further off the consumer, internet, or hardware deep end. I wouldn't be surprised if Stephen Sinofsky, who was apparently a bad personality, but a guy that got things done, was brought back. Would they bring in an outsider? Acqui-hire a new and brilliant CEO? I wish I knew.

I hope some fresh blood can liven up that company, get a more reasonable patch schedule, and for god's sake get rid of the stack ranking system. It does you no good to pit your employees against their fellow team members. I'm certainly glad that there will be a new sheriff in town soon.

One thing is certain: the next Microsoft CEO will be much quieter and saner than Steve Ballmer. And he won't dance like a monkey with pit stains. 

Vincent Trivett is a journalist and photographer who has written for Business Insider, City Limits, WNYC, the Atlantic's Business blog, Yokohama Seasider Magazine, Koe Magazine, the Japan Beer Times, and of course, Minyanville. Read more of his work for Minaynville, here.


It's Simple: Quit Wasting So Much Money
By Sean Udall

So who should lead Microsoft into the next chapter -- a chapter that should be one filled with imagination, renewed growth, better financial engineering, and massive improvement in what has been a terrible M&A strategy?

These are things I believe Microsoft needs, and I believe needs will dictate who the board should pick. And this is an area of some debate. Many just think Microsoft needs to increase the divvy and buy back more stock. This hasn't worked for the last decade, so why would a little bit more of it work now?

Again, Microsoft has been terrible at strategic M&A and a poor steward of its cash stockpile, which could have been used as a weapon to generate market-beating investment returns. Thus, in my view, Microsoft should just copy successful playbooks -- which are Oracle's, IBM's and Berkshire's (NYSE:BRK.A). Or said another way, it should do what Google has been doing with its cash and M&A: acting strategically.

The very best choice could easily be Eric Schmidt, the leader who spearheaded the Googster to much of its best growth days and the person who set up the framework for strategic M&A, venture investing, and equity-based return expectations. He set up a great use of balance sheet strength and future cash flow.  I don't think Microsoft has a chance of pulling him, but his role at GOOG has been greatly reduced, so there might be an opening. 

Larry Ellison would be great, but he's taken. The other Google gents, Larry Page and Sergey Brin, are taken. Warren Buffet has a full-time job and is a bit up in years.   

There are some other choices like Mark Hurd and Mitt Romney, but I'm not sure anyone else would be as good as Google's Schmidt.  

My next choices would be Joseph M. Tucci, the CEO of EMC (NYSE:EMC), and the chairman of VMware (NYSE:VMW), or another young leader from the EMC/VMW contingent. I think EMC has had a ton of challenges similar to those that MSFT has faced, but has done a tremendous job with innovation and by spinning off pieces of EMC as separate companies, thereby creating a lot of long-term shareholder value. This strategy would be another strong alternative for Microsoft and likely produce a lot of unlocked and future value for shareholders.  

Heck, I'll throw it out there. Microsoft, I'm available for the right price. I'd also probably come a little cheaper than Schmidt!! Though I'm quite sure the search committee wouldn't be thrilled by my street smart/tough attitude or my "pedigree." But I wouldn't have bought aQuantive ($6 billion), nor Skype ($8.5 billion), nor Danger, nor Yammer (a billion), nor would I have created Bing, nor would I have spent a ton of money on Windows Phone. And that is a short list of what I wouldn't have done. 

What I would have done is invested a lot of money in great startups and a substantial chunk in select tech equities when they were cheap. I would have bought or tried to buy Business Objects and Applix TM/1, both of which were bought by IBM. I would have purchased Splunk (NASDAQ:SPLK), Qlik Technologies (NASDAQ:QLIK), Citrix Systems (NASDAQ:CTXS), BroadSoft (NASDAQ:BSFT), and Acme Packet (NASDAQ:APKT), the last of which was bought by Oracle (NASDAQ:ORCL.).

Bottom line, and joking aside, the key for Microsoft is to simply quit wasting money on poor past investments and R&D deployments. Once the waste is contained, a ton of improvement can be created by just solid block-and-tackle investing. Then the focus can return to enhanced ROI on the balance sheet via strategic M&A and innovation for future growth. Given that recipe and just moderate success of implementation, it wouldn't be hard to double Microsoft's market cap in a few shorts years.

Sean Udall is an investment strategist, portfolio manager and proprietary trader with extensive experience across a wide variety of asset classes, including equities, fixed income, currencies, and derivatives.  He’s a recognized trader, prolific writer, and the founder of the TechStrat Report, a technology-focused investment newsletter from Minyanville. Read more of Sean's commentary, here.

Sean Udall has positions in MSFT, AAPL, GOOG, and VMW.


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No positions in stocks mentioned.