Ballmer Needs to Live Up to the Hype

Following Tuesday's disappointing Yahoo! (YHOO) (Cramer on YHOO - Stock Picks) earnings, we'll see many press articles Wednesday congratulating Microsoft (MSFT) (Cramer on MSFT - Stock Picks) CEO Steve Ballmer for walking away from the $31-a-share deal to acquire Yahoo! a few months back. Jerry Yang and his board will be pilloried again for their arrogant decision to dismiss the buyout offer.

Yet, shareholders might soon plant a bull's-eye on Ballmer's back.

Microsoft's stock sits around $24, as it did in 1998. Like the S&P 500's returns over the past 10 years, you could also refer to that period as Microsoft's lost decade.

Microsoft has more revenue, more businesses and more employees today than in 1998. But with this, it has become more bureaucratic. It's paid out dividends and bought back stock with its considerable cash hoard. And shareholders see its grip on the PC loosening as the world moves to Web services, and Microsoft is a distant competitor to Google (GOOG) (Cramer on GOOG - Stock Picks) in that sphere.

Although some Microsoft shareholders I spoke to this summer were pleased that the company abandoned its foray to purchase Yahoo! at a significant premium, Ballmer's reputation among his shareholders was damaged from that episode.

More than ever, Microsoft shareholders are wondering where Ballmer is leading the company. Will Microsoft be a large cash-cow conglomerate that pays a nice dividend and grows much more slowly?

Will it make a splashy and expensive acquisition of Yahoo!, Research In Motion (RIMM) (Cramer on RIMM - Stock Picks), or SAP (SAP) (Cramer on SAP - Stock Picks) to try to keep up a faster rate of growth? Or will it be stuck in the middle of those two very different strategies, trying to do both?

It's up to Ballmer to articulate first to his board and then to shareholders (and potential shareholders) what his plans are. Eight years into his tenure, he hasn't done this.

A classic stereotype about CEOs is that those who come from a sales, engineering, or finance background tend to be more short-term focused and analytical. Those from marketing or a variety of functional background experiences tend to be more strategic and long-range thinkers.

It's not either/or, of course, as the best CEOs have a combination of short-term decision-making and street smarts, balanced with a long-range vision.

Ballmer is often described (even in his official corporate bio) as ebullient, hard-charging, passionate and dynamic. These are all fine characteristics, but clearly he's not spent enough time with shareholders selling the overall plan for Microsoft.

If you're a value institutional investor and buy into Microsoft now because of its low price-to-earnings ratio and dividend yield, you face the possibility that Ballmer might change the rules of the game next week with another "transformational" acquisition. This "undefined strategy risk" is a weight on the stock price.

Ballmer can easily correct this problem, and Microsoft has such wealth, talent and market leadership that it cannot be counted out. Despite Ballmer's enormous personal wealth, it's likely he views the next 10 years of his career as the most important. This is his time to step out of Bill Gates' shadow and truly leave his mark on Microsoft.

I believe the "growth model" of Microsoft is a more compelling vision than the "utility model." To execute that vision, he will probably need to shed some businesses to increase its focus.

We'll see whether Ballmer can make this elephant dance.

Disclosure: At the time of publication, Jackson's fund owned no Microsoft or Yahoo! Jackson still personally holds a small long position in Yahoo! in his personal account.

Comments

[photoman:]

Perhaps, Ballmer can pick up Yahoo for a song until it's over. Certaunly, Jerry Yang is doing his best to destroy rather than enhance shareholder value.

2008 Oct 22 04:05 PM

[Michael Comeau:]

MSFT's problem is that is the world's worst allocator of capital. It has spent huge amounts of money to break into new markets and has consistently failed to generate new profit drivers. At the same time, the core business is being eaten alive by companies like AAPL.

As far as next O/S goes, it will have an even smaller impact than Vista did because people have been let down by MSFT way too many times.

2008 Oct 22 05:36 PM

[Michael Comeau:]

I should add - MSFT will likely keep the majority of its share in enterprise business, but they will lose enormous share on the consumer side.

2008 Oct 22 05:36 PM

[jfrits:]

been on Yahoo! finance website lately? u used to have to pay thousand$ for investing info, data, and tools that good. thank god, msft didn't acquire and screw it up with registration fees and .net framework update bugs.
long live YAHOO! i'll never have to look at an Omega charting/market tools glossy brochure again! by the way, the ads are less disturbing than TV -- e.g. the Wentworth victims screaming at Billy May -- except for that sexy dish network ad for their own PPV "hot bodies" special!

2008 Oct 22 09:40 PM

[Josh Thompson:]

Ballmer has done a great job generating a better income statement and balance sheet. That is not reflected in the share price because the P/E ratio has collasped. He was able to do this great job while not getting the free ride of a skyrocketing stock price to keep morale high that the previous mgmt had working for them.

2008 Oct 22 10:48 PM

[Rokjok777:]

Josh wins the award for the right answer. MSFT used to get a growth stock multiple, now closer to a utility multiple. Income and balance sheet are the envy of every corporation in America. BUT: where to from here?

2008 Oct 23 03:52 AM

[Jonha's Pop:]

"MSFT has consistently failed to generate new profit drivers" ? What is the X-BOX ?

2008 Oct 23 11:53 AM