Tale of two CEOs

Cisco/Microsoft: John Chambers and Steve Ballmer have much in common. For more than a decade, both have run dominant, if rapidly maturing, tech juggernauts - Cisco Systems and Microsoft, respectively. And, both have let down their shareholders. The difference is that one seems to have recognized the error of his ways and is repenting.

After years of frittering away Cisco’s cash on acquisitions and overpriced stock buybacks, Chambers has gotten religion. He’s paring back the company to focus on its core networking businesses and streamlining management ranks. As Chambers said on Wednesday, “We have acknowledged our challenges. We know what we have to do."

Chambers has instituted a dividend. If he can resist more of the shopping excursions that saw him spend $34 billion in the past decade, he may even manage to kick-start his stock after a decade of directionless returns.

Compare that with Ballmer. Just before Cisco released third-quarter results, Microsoft agreed to spend $8.5 billion on Skype. Without a serious financial rationale for the purchase of the Internet telephony group at 10 times sales, Microsoft took another leap into what Cisco’s Chambers used to call “market adjacencies."

There may be some Skype synergy with Microsoft’s many products. But they are fuzzy, in the same way that Cisco’s lurch into the consumer business with the acquisition of cable set-top boxes and handheld video cameras was.

What has made Chambers see the light, while Ballmer continues building an empire of adjacencies? After all, Microsoft’s stock has underperformed Cisco’s over the past 10 years. It’s down more than 25 per cent, three times the drop in Cisco’s stock - though admittedly Ballmer instituted dividends years ago, which has made the total return less disappointing for investors. One simple explanation lies in the shareholder base. Chamber’s decision to revamp the company came with activist investors circling. With no single major shareholder to protect him, Chambers grasped the risks of inaction.

Microsoft’s ownership, by contrast, is still dominated by its chairman and founder, Bill Gates. He and Ballmer own more than $20 billion of Microsoft stock, giving them a combined stake bigger than 10 per cent, something no outside investor could amass. With insulation like that, it’s no surprise Ballmer is still able to run amok.