So tired were investors with Microsoft Corp.'s leadership, they deemed any alternative to Steve Ballmer to be worth about $20-billion (U.S.).
Upon the surprise announcement on Friday that Mr. Ballmer would be stepping down as leader of the languishing behemoth – just the second change in power since Microsoft's IPO – the company immediately appreciated by 8 per cent. The anyone-but-Ballmer faction of shareholders wanted change, whatever the risks.
Now investors face a tough decision: With Mr. Ballmer on his way out, is the stock worth buying?
There is no succession plan. And much standing in the way of Microsoft reclaiming its innovative prominence and carving out a viable future.
"Whether Ballmer's there or not, the fundamentals have not changed. Whoever is coming in, the challenge ahead is pretty daunting," said Yun Kim, a managing director at Janney Capital Markets in New York.
It's not uncommon for a long-awaited resignation to be enthusiastically embraced by investors. And in Microsoft's case, where leadership turns over only once a generation, the effect may be exaggerated. Whether investors overreacted depends on the measure of power wielded by the outgoing resident of the corner office. "In recent years there's been a growing view that whoever occupies that position can either make or break a firm," said Peter Buchanan, senior economist at CIBC World Markets. "And I think in many cases, that's correct."
Despite the company's strategic shortcomings, financial results have been decent. Prior to the resignation, Microsoft's stock rose by 22 per cent, year to date. But after taking over from Bill Gates in 2000, Mr. Ballmer radically misgauged the trends in mobile devices, having predicted the failure of the iPhone and having shelved a Microsoft-designed tablet. Mr. Ballmer remained prohibitively loyal to the company's software product suite, including Windows and Office, which remained immensely profitable. "But you can only squeeze margins on your core product for so long," Mr. Kim said. "Lack of innovation finally caught up with them."
Just six weeks ago, the company announced a major restructuring emphasizing new hardware and cloud-based services. Mr. Ballmer would oversee its implementation. Evidently, someone or something changed his mind.
There is now no obvious candidate to take control of the company. The potential replacements have almost all been fired or resigned over the past five years. And Microsoft's strategic course is murkier than ever. "The pending CEO change, coupled with dramatic changes in the technology sector … creates a 'fork in the road' moment for Microsoft," said Karl Keirstead, an analyst at BMO Nesbitt Burns, in a note. "While it is easy to argue that Microsoft needs to unshackle itself from the PC and shift more aggressively to mobile devices, it is not obvious how."
Nor is it obvious how the company's stock could have further immediate upside. It's already trading at 12 times estimated 2015 earnings – the upper end of the multiple range occupied by its peers, even before considering Microsoft's "still-huge exposure to the declining PC market and the tough IT budget environment," Mr. Keirstead said. He has a "neutral" recommendation and a new $37 price target on the stock.
Some of the investor optimism could stem from anticipation that the company will now be more receptive to shareholder urgings.
Investors have long argued for the company to hone its focus on its best performing enterprises, abandon its unprofitable projects, and redirect more of its $77-billion cash reserve to shareholders. U.S. hedge fund ValueAct Capital recently took up a $2-billion stake in Microsoft and has reportedly been pushing for a seat on the board.
"I think a lot of the market reaction is driven by the stock activists being involved," Mr. Kim said. "Without a strong CEO, some sort of stock activist agenda could be better received." He has a price target of $34 on the stock.
According to the company, it will take up to a year to choose the next CEO. Investor reception aside, Mr. Ballmer's exit will introduce some transition risk in the interim, Mr. Kim said. "And there's no guarantee that somebody else coming in will be able to make the changes required to turn the ship around."