"Satya is the stay-the-course guy."
Mr. Satya Nadella has not yet been named as the person to follow Steve Ballmer as the Chief Executive Officer of Microsoft Corporation. But, it is rumored that he will be named to the post this week.
Ballmer has been the CEO of Microsoft since January 2000.
Satya is from inside Microsoft. He is a part of the Microsoft culture, a culture that stock full of "fractious politics." A company that does not have "a great track record of embracing outsiders brought into executive jobs." A company that " chews up and spits out new hires in senior roles."
Another reason for hiring Nadella is "the sheer vastness of Microsoft. The company has about 100,000 employees and will add another 32,000 through its acquisition of Nokia's mobile phone business."
Furthermore, "the company is already in the process of a major reorganization." Ballmer began the reorganization before he announced his retirement last August.
Oh, and by-the-way, Bill Gates seems to have favored a person with strong technical skills in the person who will take over the reins at Microsoft.
Does anyone see a problem here?
First, I am not so sure that Microsoft needs "a person with strong technical skills" to become the CEO of Microsoft. In a recent post I laid out some of the problems that I believe Microsoft is facing.
Microsoft has been in an enviable position. All the time Mr. Ballmer has been the CEO at Microsoft, the company has earned a return on shareholder's equity that has exceeded 15 percent. Most companies would love to have been in that position.
But, the stock price of Microsoft was around $40 a share when Mr. Ballmer became CEO and it has never reached that level since.
Microsoft has consistently generated a substantial cash flow every quarter during this period, a performance that is typical of a company producing an "information good" that has secured its place in the market with a near monopoly with an exceptional network foundation to work from.
Microsoft has subsequently been heavily criticized for the huge cash balances it has maintained over time. Some activist shareholders have become more and more critical of the company for this.
And, then in recent years, Microsoft went to the capital markets and participated in several issues of debt … for the first time in its history … in order to take advantage of the incredibly low interest rates. The assumption was that Microsoft was gearing up for an acquisitions binge as the economy recovered. The only major event in this space was the acquisition of Nokia's mobile phone business. Critics wonder why these debt issues were needed when Microsoft does not seem ready to absorb acquired firms and seems to have sufficient cash around to make deals if it felt like moving in that direction.
The crucial question becomes … with Microsoft earning such high rates of return on equity and generating so much cash … why has the price of Microsoft stock "flat-lined" the 2000s?
The answer: Microsoft has flunked the test of using its retained earnings well!
In my January 24 post, I argue that the basic investment Microsoft made and the near-monopoly position Microsoft achieved in the market with its foundational product still generates exceptional earnings due to the huge platform it controls. The new "stuff" it has invested in has just returned the company's cost of capital…if it has earned that.
New products, like Xbox One, as sexy as they might be, earn very small profit margins and must continually be updated to meet competition. They just do not have the gross spreads that earlier "information goods" produced. Thus, the market is not rewarding these efforts because they are just covering "opportunity costs."
This is not a "technical problem" for a "technical person." Someone at Microsoft is going to have to determine how to best use Microsoft's cash hoards. I have no evidence at this time that Nadella has any ability to carry this off successfully.
Then there is the major corporate reorganization that Mr. Ballmer initiated at Microsoft before he announced his retirement.
My question is … did Mr. Ballmer have any idea that he was going to resign at the time he initiated this major re-structuring? Did Mr. Ballmer put this major reorganization into place as a possible means to justify his continuing in the CEO position?
I believe that the timing of this reorganization was horrible! And, this is an understatement!
If Ballmer did this to try and protect his tenure as the CEO then I have some words about him that should not be repeated in a public forum.
Putting this aside, I would argue that it is next to impossible to hire any well-qualified individual to come in and take charge of a company that has already begun a major reorganization. I have been hired to do three corporate turnarounds and I know that I would avoid considering taking a CEO's position of any company that was in the middle of a major reorg. If I am going to join a company to turn it around, I want to be absolutely in control of any re-structuring to take place! There are enough hard decisions to make in such a situation that a new boss does not need to take on the reorganization started by someone else.
Is this a reason that Microsoft seems to have ended up with an insider to fill the CEO position? In my mind this question will always be there.
So, "Satya is the stay-the-course guy."
Mr. Nadella may be a very qualified person to become CEO of Microsoft. Mr. Nadella may be able to turn Microsoft into something that investors will drive up the price of Microsoft's stock. I hope so.
But, the whole search exercise that has taken place at Microsoft is not a picture of how things should be done.
There is a further rumor that Bill Gates may be replaced as the Chairman of Microsoft … even though he will stay on the board. I believe that this would be a good first step!