Shares of Microsoft (NASDAQ:MSFT) have rallied more than 15% since Steve Ballmer announced he would be stepping down as CEO several weeks ago. Since then, speculation has swirled over who will be the new CEO at the tech icon with a lot of focus on Ford (NYSE:F) CEO Alan Mulally, who is clearly Wall Street's preferred choice. In fact, Bank of America/Merrill Lynch said on Monday that selecting Mulally could send the stock 10% higher, while any other choice would send shares falling 10%. In a well thought out article on Seeking Alpha, another contributor argued that Microsoft should hire Mulally (article available here).
While I respect these opinions, I believe Mulally is a poor choice for CEO. I want to begin by saying I have great respect for the Ford CEO, as he might be the greatest CEO in this young century (Steve Jobs being the other candidate for the title). However, individuals have core competencies that make them great at what they do. I question whether Mulally's core competencies align with Microsoft's needs.
Mulally's expertise is in manufacturing as he has spent his career at Boeing (NYSE:BA) and Ford. The skills in running a manufacturing company are not necessarily those required to revamp a software maker. Mulally's success at Ford can be broken into two primary achievements; I question how helpful they will be at Ford.
First, Mulally saved Ford through his aggressive balance sheet management upon taking the helm in 2006. He saw the challenges the automaker would face and the likelihood of a credit crunch. He immediately took out as much debt as possible, even mortgaging the Ford brand, to raise a total of $23 billion, which gave Ford the capacity to ride out the coming storm. He also sold extraneous brand like Jaguar to refocus the company and raise additional cash.
Unlike Ford in 2006, Microsoft has no cash crunch or mounting losses. The company is posting record profits and has a cash balance of $80 billion. Microsoft is exploring ways to return more cash to shareholders through large buybacks and a growing dividend. Mulally proved himself to be a fantastic capital allocator for a company under severe duress. Microsoft simply is no such company. Mulally deserves great credit for his 2006 borrowings as they saved Ford, but they are in no way applicable to the current situation at Microsoft. If anything, it is the total reverse, and the board has already shown itself willing to return cash to shareholders. Mulally is no help on this front.
Mulally's second great achievement is right sizing the cost structure at Ford to deliver strong profits and impressive operating margins. He successfully negotiated lower labor costs with the UAW, cut excess capacity in Europe, and implemented the "One Ford" strategy to build cars with global appeal, making manufacturing and R&D easier and less costly. At the same with weekly roundtable meetings every Thursday, Mulally has improved collaborations between Ford's various business units to build better ideas and a more cohesive strategy. Ford has been gaining share and growing profits, so clearly these initiatives have worked very well.
Once again, this skill set may not be perfect for Microsoft. Microsoft has no union or labor expense issue, and right-sizing a manufacturing process is a skill with no applicability to a software company. Mulally's collaborative style seems to work well, and it would follow that it can work at companies in various industries. In this sense, he may make upper management more effective by building a stronger sense of unity. However, Mulally is not the only CEO who focuses on a collaborative management, and I would put forth that MSFT could find someone with a tech background who has a similar style.
Investors are left with the question of whether a tech company demands someone with technical experience to be its CEO. A question I would put forth is this: do you believe Steve Jobs would have been as successful if he had been named CEO of Exxon Mobil (NYSE:XOM) in 2001? I don't believe so, because Jobs' brilliance was in consumer technology. To work in another industry would have been a disservice to him and the company he joined. Mulally might be able to better manage the decline at Microsoft, but I don't believe he has the skills to be a transformative leader, to reinvigorate Windows, and to grow share in mobile. Only a visionary technological thinker can do this.
If Microsoft wants to adapt to changing technological landscape and grow its platform, it needs to hire a CEO who understands and has experience in new technology. Mulally's core competencies lie in balance sheet management and manufacturing efficiencies. These are not the skills MSFT demands. I have tremendous respect for what Mulally has done at Ford, but if he gets the job, I would be a seller of MSFT.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.