Microsoft Corporation (MSFT): Can Nadella Change How The Board Thinks?

Microsoft Corporation (MSFT): Can Nadella Change How The Board Thinks?
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We heard on Thursday that Microsoft Corporation (NASDAQ:MSFT) was getting close to naming the next CEO and, in fact, that it looks like internal candidate Satya Nadella may end up getting the job. In addition, Bill Gates could end up stepping down as chairman at the same time. So what does this mean for the future of Microsoft? Nomura analyst Rick Sherlund, who’s been following Microsoft for many years, weighs in on these possible changes.

Will Bill Gates really step down?

Sherlund thinks Bill Gates has been pushing for a technical person to become the next CEO, ensuring that the company he founded will continue to have a “technical visionary” to guide the company. He said by choosing a technical person, Gates would be able to reduce his involvement with Microsoft Corporation (NASDAQ:MSFT) even further. As a result, he said it isn’t necessarily surprising that Gates would step down as chairman. Instead, he suggests that only the timing is a bit of a surprise.

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Kara Swisher of re/code, however, suggests that there could be a different reason Gates would step down as chairman. She believes that instead of reducing his involvement at Microsoft Corporation (NASDAQ:MSFT), he would simply change what he does. In fact, she said sources have told her that Gates could be a sort of “wingman” for Nadella, since Nadella had asked Gates to work more closely with him on the technology and product side of the business. She also points that in terms of running the board, Gates isn’t really put to best use since his strengths lie in technology, and he’s a “terrible schmoozer of investors.” If she’s right about Gates bringing his technical expertise back to Microsoft, this could be a great thing for the company.

Reports suggest that independent director John Thompson could replace Gates as chairman of the board. If this is true, then Sherlund suggests that he could play a more active role at Microsoft Corporation (NASDAQ:MSFT), particularly if Nadella is indeed the next CEO. And Thompson just may make a better chairman than Gates ever was.

Pushing for outside candidate at Microsoft

The analyst notes that Satya Nadella would fit Gates’ desire for a technical person to take over the helm. And after the acquisition of Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s devices division is complete, the company will have more than 130,000 employees. With such a massive company, Nadella may need a chairman like Thompson who can take on a more active role, particularly as Nadella continues to work on changing the vision of Microsoft Corporation (NASDAQ:MSFT).

Sherlund said he had been hoping that an outside candidate would prevail in Microsoft Corporation (NASDAQ:MSFT) search for a new CEO because an outsider might be a better change agent. He said an external candidate could have more experience running a massive company and executing a turnaround while also talking the board into working to enhance shareholder value.

Microsoft’s board must change the way it thinks

The analyst suggests that some possible ways to enhance shareholder value might be a 10% share repurchase and a 10% reduction in operating costs. In addition, he said “fixing the business” suggests that Microsoft Corporation (NASDAQ:MSFT) will have to pursue faster ways to grow which also have lower margins. He said pairing enhancements to shareholder value with these steps could help “fix the business” and that he would like to see both happen.

In his view, an outside candidate would have been able to change the board’s way of thinking more quickly, particularly if Thompson does become chairman. His recent conversations with Thompson suggest that he isn’t receptive to working on enhancing shareholder value through his ideas. As a result, he said it could take longer and require the efforts of activist firm ValueAct Capital to change the board’s dynamics so that they think more about shareholder value. ValueAct became involved in Microsoft Corporation (NASDAQ:MSFT) last year and went on to win a seat on the board.

Satya Nadella + Amy Hood = new direction for Microsoft

Sherlund also believes that new Chief Financial Officer Amy Hood is a good fit for Nadella and will be able to work with him to “both fix the business and enhance shareholder value.” He emphasized that he wants them to be free to do this, and that freedom may take some time to secure. Together, he thinks that Nadella and Hood will make a good team in terms of changing the direction at Microsoft Corporation (NASDAQ:MSFT).

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