Mr. Nadella Makes His First Major Move At Microsoft

Jul.17.14 | About: Microsoft Corporation (MSFT)


Microsoft CEO, Satya Nadella has announced that up to 18,000 employees at Microsoft will be cut over the next year.

A large part of this restructuring will be connected with bringing the mobile phone area acquired from Nokia into Microsoft.

Mr. Nadella will also use this re-structuring effort to help create the culture that he believes is necessary to support his vision of the Microsoft of the future.

One of the first rules I learned in the business of mergers and acquisitions is to promise the company that is being acquired anything it wants to hear before the acquisition is completed… and then, once the acquisition is completed, you become one of the biggest bastards in the world.

In the case of Microsoft Corporation (NASDAQ:MSFT) and its acquisition of the mobile phone business of Nokia Corporation (NYSE:NOK), the current CEO, Satya Nadella, did not have to play the first role. The first role in this transaction was filed by former CEO, Steve Ballmer.

A CEO must deal with a new acquisition as soon as possible, because if he or she lingers in taking action to incorporate that which was acquired with the parent company, cut out overlaps and duplications, and get rid of what is not needed, the task only becomes more difficult with time and the bureaucracies become more entrenched and difficult to overcome.

Thus, it is good to see Mr. Nadella act with the speed he has. Mr. Nadella became Microsoft's CEO in February this year. The Nokia acquisition was completed in April. And now, Mr. Nadella has acted in July. In my estimation… not bad!

It seems to me that as far as Mr. Nadella is concerned, the acquisition of the Nokia assets couldn't have been timed better. Dealing with the integration of what this mobile phone business does and what Microsoft does is as good a reason as any to introduce major employee cuts.

First off, a total of up to 18,000 cuts has been announced that will take place over the next year. This totals about 14 percent of the total Microsoft workforce, according to The Wall Street Journal.

Of these 18,000 cuts, there will be 12,500 cuts that are connected with the Nokia acquisition, cuts that will take place both in the acquired division and in Microsoft due to overlapping functions.

This is a pretty significant number, since the Nokia acquisition apparently brought about 25,000 employees with it. Not bad… on the surface.

Thus, Mr. Nadella and team have done quite a job in rationalizing the consequences of the Nokia transaction.

But, that leaves another 5,500 employees that will be let go of. This is a sizeable number, since the largest reduction in staff that took place in Microsoft before was a total of 5,000 employees, which occurred in 2009.

It appears, therefore, that Mr. Nadella is using the opportunity to put together the Nokia division with Microsoft as the overriding reason to rationalize the Microsoft operations as well. Given the bigger number announced, the fact that such a big number is being applied to just Microsoft operations will draw less attention.

It is estimated that these reductions will result in a charge of $1.1 billion to $1.8 billion against Microsoft earnings.

So, it appears that major changes are actually underway at Microsoft and that Mr. Nadella has the stomach to move dramatically to re-structure, mentally as well as physically, Microsoft.

This action announced today was signaled in an email message Mr. Nadella sent to the employees of Microsoft last Thursday morning. Although there were not a lot of specifics in the 3,100-word essay, there were further signals about what might be forthcoming in the future.

First of all, Mr. Nadella believes that the Microsoft organization should become flatter, that employees should find ways to simplify and work faster and more efficiently. And, he believed that they should make efforts to communicate more effectively within the organization.

In other words, it appears to me that Mr. Nadella believed that Microsoft had become too bureaucratic and needed to reflect a more dynamic culture. Information needed to be shared, not only up and down in the organization, but also horizontally.

Information technology is incorporating almost everything that people do, from the places that they live, to the glasses that they wear, to the way they listen to music, to the way they do their banking, to the way they order food, and so on and so forth.

In such a world, what one area is doing, no matter what that area is all about, it needs to be connected with as many other areas as possible. The technology is building on itself, and with a new focus specifically on the cloud and mobile devices, the culture of the institution needs to be as integrated as possible.

So, we are seeing more and more of the future that Mr. Nadella sees for Microsoft.

I must admit, so far, I like what he is doing. He does not seem to be afraid of making changes… some of them being relatively dramatic. This move on bringing the acquired mobile phone area into Microsoft seems to me to be spot-on. I don't believe that Ballmer could have pulled this off.

It appears to me that Nadella is planning on making some significant changes structurally, as well as in terms of employees, to the rest of the business. Although we don't know specifically what they are, the things that he is doing is building some confidence in his leadership capabilities.

Still, we need to see more specifically what his vision of Microsoft is going to be. He is new to the position, being in only the sixth month as the CEO, so his "honeymoon" remains in force. My guess is that we will see more and more of this vision as he moves on from the demands of his immediate ascension. So far, I give Mr. Nadella good marks for what he has done and for his communications with the investment community.

Disclosure: The author is long MSFT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.