Microsoft Corp. (NASDAQ:MSFT) announced on Friday morning that CEO Steve Ballmer would retire within the next 12 months. The company is currently undergoing its transformation as consumers move away from PCs to tablet and mobile devices. Ballmer will continue to serve as CEO until a new successor is named.
In an internal email to its employees, Ballmer said:
"There is never a perfect time for this type of transition, but now is the right time. We have embarked on a new strategy with a new organization and we have an amazing Senior Leadership Team. My original thoughts on timing would have had my retirement happen in the middle of our company's transformation to a devices and services company. We need a CEO who will be here longer term for this new direction."
A special committee has been appointed to determine who should lead Microsoft into the future. The committee is being chaired by John Thompson, the board's lead independent director, and includes its founder and chairman, Bill Gates. The committee is said to be considering both internal and external candidates.
Steve Ballmer joined Microsoft in 1980, and became CEO in January 2000. Under his tenure, the company has entered the video game industry with the Xbox consoles, and expanded into providing data services and enterprise solutions to businesses. Although these segments now contribute a significant proportion of Microsoft's revenue, and the outlook for which are rosier than its legacy business; Ballmer has been slow and reluctant to reposition the company towards fast-growing consumer markets and business services. During this time, Microsoft's share price has largely stagnated since the end of the dot-com bubble.
Unfortunately, Ballmer had struggled to break into the tablet and mobile computing market, to offset the effect of declining PC sales. Its Windows 8 operating system, which attempts to bring together PC, tablet and mobile devices under a similar user interface has been plagued with technical issues and has been criticized as being difficult to use. Combined with declining PC sales and the reluctance of existing users to upgrade to the new operating system, Windows 8 has largely failed to meet original expectations. The company also booked a $900 million write-down on Surface RT tablet, as it slashed the price of its tablet to reduce its inventory of unsold devices.
Despite recent setbacks in selling mobile and tablet software and devices, Microsoft is still extremely profitable. Revenue for FY 2013 reached $77.8 billion, and net income was $21.8 billion. Its Windows operating system and Office franchise still commands great consumer loyalty, as ensuring interoperability makes switching costs high. With Microsoft's wide economic moat, these products will continue to generate vast revenues and profitability to the company for the foreseeable future. More innovation, flexibility and collaboration are what are needed to develop new products and expand its cloud-based services. Hopefully, a replacement CEO is what is needed to steer Microsoft towards its 'new direction'.
At the end of June 2013, Microsoft had cash and short-term investments totaling more than $77 billion. With just $15.6 billion of debt, there is significant scope for unlocking the value within Microsoft. Investors expect Ballmer's successor would be more willing to unlock shareholder value through increased buybacks and an increased dividend payout ratio. Alternatively, or perhaps concurrently, a new CEO may also decide to undertake acquisitions in order to accelerate Microsoft's transformation away from legacy businesses.
Even with today's positive market reaction to Ballmer's departure, Microsoft is currently trading at a forward P/E of 12.4 and offers a dividend yield of 2.7%. With the potential for unlocking greater value, and with a new direction for the company forthcoming, Microsoft's valuation is rather attractive.
Microsoft shares rose 5.6% to $34.21 on Friday morning.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MSFT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.