The most exciting part of elevating Satya Nadella to chief executive officer of Microsoft Corp may be that it would end the search to replace Steve Ballmer, investors in the world's biggest software maker said.
The 46-year-old native of Hyderabad, India, is a cloud computing whiz with the potential to reverse Microsoft's image as a company stranded in the past, said Chad Morganlander, a fund manager at Washington Crossing Advisors. At the same time, he spent two decades working for Ballmer and Bill Gates and shareholders may be disappointed no outside candidate was found, said Donald Selkin of National Securities Corp.
Microsoft's board is preparing to make Nadella, the company's enterprise and cloud chief, its CEO, and is discussing replacing Gates as chairman, according to people briefed on the process who asked not to be identified because the process is private. Microsoft spokesman Frank Shaw declined to comment.
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"It's a safe choice," said Kevin Walkush, a business analyst at Jensen Investment Management in Lake Oswego, Oregon. The firm oversees $7.2 billion and has 6.7 million Microsoft shares. "There's a large faction that wants a disruptive tech visionary to take over Microsoft and that group will probably be disappointed. Another group of people think we need a person like Satya who knows the business because it's so complex and needs someone that has the inside knowledge."
The stock fell 0.4 per cent to $36.73 at 10:23 am New York time today, after rallying 1.1 per cent to $37.25 in after-hours trading as Bloomberg News reported the discussions yesterday. The stock is down 1.8 percent this year.
Relief rally
Nadella, president of Microsoft's server business, was picked after several candidates declined to be considered. Ericsson AB CEO Hans Vestberg said he plans to stay at the Stockholm-based electronics maker. Ford Motor Co CEO Alan Mulally took himself out of the running earlier this month.
"Shares might get a relief rally simply on closure of the issue even if the outcome is less than ideal," Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc, which oversees about $17 billion including Microsoft shares, wrote in an e-mail. "Shareholders were hoping for an outsider with a fresh perspective."
For investors, Nadella's challenge is to ignite shares that have been left behind by Google Inc and Apple Inc Microsoft has generated a total return of 74 per cent since January 2004 compared with a 93 per cent gain in the Standard & Poor's 500 Index. "That's why the stock has sagged a little bit lately," said Selkin, who helps manage $3 billion including Microsoft as chief market strategist at National Securities in New York.
"He's a company insider and I guess people are worried it's more of the same."
Moving Gates from the chairmanship would lessen the scepticism about promoting from within, said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, which oversees $63 billion including Microsoft shares.
"It will allow for this internal candidate to be viewed more favourably by the market that he won't feel the heavy hand of one of the founders and the big shareholder and the previous CEO all collectively perched above him," Luschini said in a phone interview from Philadelphia. "Maybe that was part of the negotiation."
Microsoft is in the middle of implementing a reorganisation and is working to close the acquisition of Nokia Oyj's handset unit. It introduced the new Xbox One game machine in the holiday quarter and boosted sales of Web-based software such as Azure and Office 365, even as its traditional programs continue to languish along with personal-computer shipments, which posted a record drop in 2013.
Clean break
Rivals such as Apple have shifted the technology landscape away from Microsoft's mainstay of personal computers to mobile devices. Ballmer, who said he would retire by August, last year revamped Microsoft's organisational structure and agreed to buy the Nokia operations for $7.2 billion.
"There needs to be a clean break," according to Pat Becker Jr, a fund manager at Becker Capital Management, who said that of all the internal candidates, Nadella makes the most sense. His firm, based in Portland, Oregon, oversees about $2.8 billion and owns Microsoft shares.
"It wasn't that Ballmer was bad," Becker said. "He didn't do anything wrong, financial results were good under his tenure. But I also think Microsoft is hindered by perception and the CEO and the chairman have to be somebody that people listen to in the tech world."
Other candidates
External candidates have included former Nokia CEO Stephen Elop, Ford's Mulally, Qualcomm Inc CEO-elect Steve Mollenkopf and Ericsson's Vestberg, people familiar with the search have said. The company also considered internal candidates including Executive Vice President Tony Bates and Chief Operating Officer Kevin Turner.
Microsoft has struggled to keep pace with the bull market that began in 2009, returning 175 per cent with dividends compared with 194 per cent for the Standard & Poor's 500 Index and 203 per cent for technology companies in the gauge. The shares gained 40 per cent in 2013 and its market value of $306 billion makes it the fourth-biggest company in the world behind Apple, Exxon Mobil Corp and Google.
Concern about how the software maker will keep growing has limited the stock's valuation. Microsoft trades for 13 times annual earnings, 25 per cent below the average valuation of companies in the S&P 500 Information Technology Index. It bottomed out at 8 times profits in the aftermath of the bank crisis of 2008 and sits more than 80 per cent below its multiple of 81 in 1999, data compiled by Bloomberg show.
"Microsoft is looked upon as a backward-looking technology company," said Morganlander, a Florham Park, New Jersey-based fund manager for Washington Crossing, a division of Stifel Nicolaus & Co. "I believe, on the other hand, that there's a deep future for the company and that they will, over a period of time, gain traction not only on the device side and the mobile side, but also compete on the cloud side."
