An end to an era is fast approaching for Microsoft (NASDAQ:MSFT). It long time CEO, Steven Ballmer, recently announced he was retiring after over a decade of leading the company. Now Reuters is reporting that three of the company's Top 20 investors want Chairman and Founder Bill Gates to step aside as well.
Microsoft kind of reminds me of the Pittsburgh Steelers who have had just three coaches (Chuck Knoll, Bill Cowher, Mike Tomlin) over the past 45 years. Bill Gates led the company from its IPO in 1986 until Ballmer took over in 2000. Ballmer "coached" the company for 13 years and more than tripled earnings over that timeframe although the stock market was not kind to his legacy as MSFT was basically "dead money" for most of his reign despite significant earnings & revenue increases.
Now everything is lining up for the "third coach" to be hired for the largest software developer in the world. Although it is hard to think of Microsoft without Bill Gates, but it might be exactly what the company needs in the long run.
Mr. Gates has been the figurative head of Microsoft in investors' minds for some 35 years. However, as time has gone by he has been less and less involved in the company. He has been selling off his personal holdings of stock for years and now has less than a 5% stake in the company. In addition, he has devoted more and more of his time on other endeavors like the Bill & Melinda Gates Foundation.
Most importantly, like most long time founders in the tech sector (EX, Michael Dell) he probably has been an impediment for the type of radical change Microsoft needs to make to continue to be a leader in the tech space. He definitely deserves some blame for the company largely missing the transition to mobile. Long time leaders usually have a problem in taking aim at "sacred cows" and are rarely successful in leading companies when there is a game changing shift that imperils their core products [EX, IBM (NYSE:IBM) missing the transition to PCs in 80s].
Probably the best thing for the company, its employees and its shareholders in the long term is for Mr. Gates to quietly step aside and let a new leader take over. In my personal opinion, the best combination would be to bring in a new CEO with turnaround expertise from the outside and pair him with a COO or CIO that has deep technical knowledge and is well respected within the tech industry.
There has been a lot of chatter around Alan Mulally lately, who has done a great job at Boeing (NYSE:BA) and Ford (NYSE:F) and is on a short list of outside CEOs being considered. I think this would be welcomed by shareholders who long for the company to move in a different direction.
The new CEO will have many challenges but Microsoft also has many assets that could make the new CEO's run very successful as well. The company has over $70B in net cash & marketable securities on its balance sheet. It also has quietly become the second largest "cloud" software provider in the world. Its Azure and Office 365 offerings have over $1B in annual sales and are growing rapidly.
In addition, the recent acquisition of Nokia (NYSE:NOK) and the demise of BlackBerry (NASDAQ:BBBY) has solidified the company's position as the third leading software vendor in the smartphone space behind Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG).
For investors, Microsoft is offering an attractive entry point before this new leadership transition. Subtracting cash, the stock is selling at ~8x forward earnings, growing revenues at a 5% to 7% rate annually and provides a 3.3% yield after raising its dividend payout 22% recently.
Ending on the "Pittsburgh Steelers" analogy, investors should note that the team managed to win Super Bowls under each of their three coaches over the past 45 years. Hopefully Microsoft shareholders will enjoy similar results in the long term as a new leader takes the reins.