Does Microsoft's (NASDAQ:MSFT) Steve Ballmer ever feel bad? It was almost a year ago that we published “Microsoft’s Future Is Hopeless With Steve Ballmer” and we felt bad about having to do it. But the truth had to be said. At the time we used terms like “ham-handed antics, head-in-the-sand-stubborn and beyond repair or reform as a technology company CEO” to describe him.
Steve is under attack again, but this time by someone with a bigger soapbox -- namely David Einhorn of Greenlight Capital. David noted that Steve was “the biggest overhang on the stock.” The sharp rise in Microsoft stock the day after these comments were widely reported suggests that many market players agree; it makes one wonder if the board of Microsoft might be willing to gently bring up the idea with Ballmer.
One major obstacle is that Ballmer has been at Microsoft since the early days and is still close with Bill Gates and the rest of the old boys. The fact that Steve has missed one major technology trend after another (the Internet, Software as a Service, and most recently mobile computing) doesn’t seem to matter. Recently Microsoft has been throwing some big punches at least, by partnering with Nokia (NYSE:NOK) (another dying incumbent) to regain market share, and buying Skype to insert itself into Internet communications and collaboration.
If they've done anything, the Internet, cloud and mobile computing have put pressure on incumbents like Microsoft, Nokia, Research in Motion (RIMM) and Cisco (NASDAQ:CSCO) to do things differently. We’ve seen this play out many times in technology, but to take IBM as one example, it doesn’t have to mean oblivion for the establishment. IBM built a new services business, and sold parts of the company like networking and personal computers that it couldn’t be a top player in.
The collection of IBM businesses trades at 12x earnings. Even at this fairly low multiple, Microsoft would be changing hands at $36/share versus the current $25. That’s about $100B of wealth creation in terms of market capitalization. There are some bright spots in the Microsoft business in terms of cash flow, market share, innovation and growth. But there are many dim ones as well, and company management hasn’t been able to tell the difference. Investors clearly don’t see it at these prices.
Microsoft's internal management and staff look like much of its software: Big, heavy and and slow. There’s even a company that makes an entire business by just documenting company plans and organizational structure for others that have to work with the behemoth and need some way to plan and navigate their own businesses.
On a 12x multiple, MSFT is a $36 stock, but being a pure software and services company would certainly get it a higher multiple if it can actually execute. For now, Microsoft still dominates the productivity software market, has a strong enterprise software position, has one last shot with mobile with Nokia, and has a good footprint in the home with XBox, to name a few things that it should focus on.
Culturally, the changes at Microsoft would almost certainly require an outside CEO. IBM did poorly until Lou Gerstner. Gerstner wasn’t a genius, but he was a very good general manager who knew how to deal with sacred cows and get things done. IBM was full of very smart people who could successfully argue away any brash or sweeping reforms. Despite calls to break up IBM into parts -- and expectations that he might do it -- Gerstner kept the company together. It (almost always) takes an outsider to see the truth and do what’s needed to implement it.
Any serious consideration of replacing Ballmer with an outsider would make the shares worth owning at these levels. If the board actually brought in someone with the talent to change things, the stock could see the $40’s again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.