The Ballmer Discount: Microsoft Needs a New CEO to Unlock Shareholder Value

| About: Microsoft Corporation (MSFT)
Last Friday I wrote a piece calling for Cisco’s (NASDAQ:CSCO) CEO to step down as I thought it was time after 17 years to leave the stage and that Cisco’s business and stock price would benefit from new management. It generated a lot of comments and interest as Cisco is a tech titan that has underperformed for the last decade.
There is another large-cap, well known tech name that could also benefit from a change at the top. It is Microsoft (NASDAQ:MSFT), where Steve Ballmer has been CEO for over 11 years. The stock is pretty much at the same price as it was when he took the helm despite quadrupling earnings during that timeframe. Other than a decent dividend, long term Microsoft shareholders have little to show for their loyalty over the last decade. Ballmer has always been a good numbers person, motivator, and a solid communicator. Unfortunately he is not the one thing Microsoft desperately needs - an outstanding product guy. Microsoft has consistently failed to develop new products that appeal to the consumer market despite numerous tries and vast amount of resources dedicated to the effort. (Zune anyone?)
What a New CEO Should Do
Microsoft should bring in a new leader that intimately understands the consumer market. A new chief executive could also do a few key things to quickly move up Microsoft’s valuation:
  • Raise the dividend to $1/share to provide a 4% dividend yield, which would be less than a 40% payout. MSFT has ample cash flow to support this dividend level and has excess cash on the balance sheet. In addition, hopefully this commitment will also throw an obstacle to using that cash in buying overvalued assets like the just announced Skype fiasco.
  • Maniacally focus on continuing to grow Bing market share in the search market. This is one of the bright spots for Microsoft over the last year and could develop into a core business if the company can continue to expand its market share. It also will force Google (NASDAQ:GOOG) to spend more time and resources in defending its core franchise and away from other areas it is starting to challenge Microsoft in.
  • Provided the new CEO is a great product guy, I think the very successful Kinect technology platform can be harnessed to expand on this beachhead into the consumer market with other products. If not, Kinect and the gaming division should be spun off as a separate company where it can continue to innovate and license its technology as well as partner to use this technology for a variety of uses outside gaming.
I believe if a new CEO took these simple steps, MSFT could easily achieve a much higher stock price in the short and medium term. Microsoft sells at just over 8 times 2011’s projected earnings of $2.58 if you strip out the approximately $4/share of net cash that is on Microsoft’s balance sheet. Given Microsoft’s growing earnings and revenues, cash flow generation and dividend, core franchises like Office and Windows as well as Bing and Connect, MSFT deserves at least a 11-12 multiple net of cash. This would give a price target of $32 to $35, significantly above the current price of $25.03.
Disclosure: I am long MSFT.