Over the past few days, there have been countless articles slamming Steve Ballmer's tenure as CEO of Microsoft (NASDAQ:MSFT). I think these articles are by and large incorrect; Ballmer actually did quite a fine job as CEO. Now before I get into the core of my argument, I want to precisely explain my view of Ballmer to avoid misperceptions. First, I am not saying Ballmer was the greatest CEO in history or of his era (he was no Steve Jobs for sure), but there is a middle ground between transcendent and disastrous. I contend that Ballmer was an above average, solid CEO. I also am not arguing that Steve Ballmer is the man to run Microsoft going forward; in an increasingly mobile world, it makes sense to have a CEO with a background in mobile. In this article, I am attempting to show that in his 13 years, Ballmer was underappreciated, and hopefully I will help you better evaluate other management teams, through a clear-headed, impartial approach on business, not stock, performance.
Many Ballmer haters point to Microsoft's stock performance to prove unequivocally that he was a lousy CEO:
This chart proves little, because using the stock price to evaluate Ballmer's performance is totally misguided. We want our executives to manage the business, not the stock. Can a CEO determine what multiple their stock trades at? Should he be punished for taking over when the stock was irrationally high? I want a CEO who works tirelessly to build new products, grow sales, and improve operating performance. If your management team does that, in the end, the stock will take care of itself. There are countless examples of managers who ignore the long-term prospects of the business to boost the stock price in the near term, leaving the company in disarray when they leave (i.e. Marc Hurd cutting R&D spending at Hewlett-Packard (NYSE:HPQ)).
When Ballmer took over, we were in the height of a tech bubble, and valuations made no sense. Microsoft had a $600 billion market cap with $8 billion in profits for a 75 multiple. If you took over any successful tech company in 2000, that stock would be lower today, no matter what you did, because valuations were absurd. That's the definition of a bubble. Microsoft was never really worth $600 billion; it was market mispricing. Why should we punish a CEO for a mistake in the stock market?
Since Ballmer took over, Microsoft is down 34%, but many of its competitors are worse: Cisco (NASDAQ:CSCO) is down 56%, HP is down 60%, and Oracle (NYSE:ORCL) is down a whopping 70%, yet I hear little hatred for Larry Ellison. For some reason, Ballmer receives an irrationally large amount of hate because he became CEO right when the tech bubble burst, thereby distorting the stock's performance.
As I've argued, stock price is not an appropriate yardstick to measure CEO performance because it is out of their control. We should focus on business performance, and that is what I will do now. We've heard the same drumbeat: Microsoft has totally missed mobile, dropped the ball on Windows, and has struggled to grow. Unfortunately, this narrative is wrong and misleading. When Ballmer took over, the firm had $7.8 billion in profits from $19.7 billion in sales. Today, the firm generates $22 billion in profits on $77 billion in sales. During his tenure, sales grew at an annualized 11% clip, profits at 8.3%. That's not too shabby, especially in light of the tech bubble burst, financial crisis, and the ensuing Great Recession. Here is a look at MSFT's operating performance over the past decade:
Was Microsoft perfect under Ballmer? No, of course not, but it certainly wasn't bad, especially when a large cap company can grow three times as fast as GDP and management is taking share from competitors. In other words, management is doing a good job. 11% sales growth is solid, not amazing, but solid performance. Clearly, Ballmer grew the business, despite the talk of impending doom. Certainly Microsoft's struggles in the smartphone sector are a disappointment, but by focusing on the negatives, you ignore the biggest hallmark to Ballmer's tenure: Xbox. Xbox's business segment (Entertainment and Devices) now generates over $10 billion in annual sales. There are few businesses that did not exist 13 years ago and now generate over $10 billion; Facebook (NASDAQ:FB) only does half that. It's a tremendous accomplishment that has given Microsoft a foothold with consumers from which it can expand on by being a one-stop entertainment destination. Xbox is a tremendous legacy to have, and Ballmer deserves more recognition for it.
Meanwhile, Ballmer leaves Microsoft in fantastic position. Bing is growing, Windows 8 was a stabilizing force, some progress has been made into Smartphones, and Xbox remains strong. Further, the company has $77 billion in cash that it can use to buy back more shares, invest in R&D, or acquire new businesses like a Twitter to gain a foothold in social media.
Using the stock price to gauge CEO performance is misguided, because the CEO cannot control it. Further, a CEO should not be held accountable (or given credit for) irrational valuations in the equity market. If for no reason, a stock you own doubled tomorrow, should your opinion of its CEO change? I contend it shouldn't. Managers should be evaluated based on the performance of the business, which over time determine dividends and stock prices. Under Ballmer, sales quadrupled and income tripled, while transformative businesses like Xbox were started. Ballmer is leaving Microsoft stronger than when he inherited it. As such, he was a successful CEO who deserves more recognition and less ridicule.