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 (Nasdaq: MSFT) 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.
“It’s a safe choice,” said Kevin Walkush, a business analyst at Jensen Investment Management in Lake Oswego, Ore. 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 climbed 2.7 percent to $37.84 Friday, after rallying 1.1 percent to $37.25 in after-hours trading as Bloomberg News reported the discussions Thursday. The shares are up 1.2 percent this year.
Nadella, president of Microsoft’s server business, had emerged in late November as the leading internal candidate. In the past month, outsiders such as Ericsson AB (Nasdaq: ERIC) CEO Hans Vestberg and Ford Motor Co. (NYSE: F) CEO Alan Mulally publicly took themselves out of the running. Mulally’s chances have faded amid concerns about his age and lack of technology experience, people familiar with the matter have said.
“Shares might get a relief rally simply on closure of the issue, even if the outcome is less than ideal,” wrote Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $17 billion including Microsoft shares. “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. (Nasdaq: GOOG) and Apple Inc. (Nasdaq: AAPL). Microsoft has generated a total return of 74 percent since January 2004, compared with a 93 percent 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 skepticism 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 favorably 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 reorganization 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.
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, revamped Microsoft’s organizational structure last year and agreed to buy the Nokia operations for $7.2 billion.
“There needs to be a clean break,” said Pat Becker Jr., a fund manager at Becker Capital Management, who said that of all the internal candidates, Nadella makes the most sense. Becker’s firm, based in Portland, Ore., 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.”
External candidates have included former Nokia CEO Stephen Elop, Ford’s Mulally, Qualcomm Inc. (Nasdaq: QCOM) 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 percent with dividends compared with 194 percent for the Standard & Poor’s 500 Index and 203 percent for technology companies in the gauge.
The shares gained 40 percent in 2013 and its market value of $306 billion makes it the fourth-biggest company in the world behind Apple, Exxon Mobil Corp. (NYSE: XOM) 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 percent below the average valuation of companies in the S&P 500 Information Technology Index. It bottomed out at eight times profits in the aftermath of the bank crisis of 2008 and sits more than 80 percent 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, N.J.-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.”