When Steve Ballmer announced he was stepping out as MicrosoftCEO in August, industry watchers said the world’s largest software maker needed an outsider to step in and shake things up at a company trying to transform itself into a devices and services company.
What a difference five months makes.
Microsoft’s board is now reportedly negotiating with Satya Nadella, a 22-year Microsoft veteran credited with helping grow the cloud computing business. Nadella’s rise to the top of the CEO search list comes after three external candidates were counted out of the running in recent weeks – Ford CEO Alan Mulally, Ericsson CEO Hans Vestberg and Qualcomm COO Steve Mollenkopf, who was named the next CEO of the mobile chip maker last month after Microsoft’s interest in him became known.
It also comes after Microsoft last month reported a 14 percent jump in quarterly sales to a record $24.5 billion, a sign it is making progress selling devices, including its Surface tablet and Xbox game console, and Web-based Office 365 software and Azure cloud services. CFO Amy Hood, who has been in the top finance job since May, is also earning praise for her work controlling costs and is being touted as a strong executive who could take on a more prominent role and bring the operational expertise that tech-savvy Nadella lacks.
“Mr. Nadella is a strong choice for the role, given his impressive track record leading Microsoft’s enterprise and cloud business,” Barclay’s analyst Raimo Lenschow told investors last week. “Further, we believe the most recent quarter demonstrated the effectiveness that Amy Hood, the new CFO, is having, particularly around cost control, realigning the business, and setting expectations…The combination of Mr. Nadella and Ms. Hood could be a recipe for successfully managing Microsoft’s transition to a ‘devices & services’ company and, ultimately, driving better shareholder value.”
“He is well thought of,” longtime industry analyst Roger Kay of Endpoint Technologies says of Nadella. “As an insider, he’ll know the culture and has the respect of the senior software engineers, something that an outsider would have a hard time doing.”
Still, that doesn’t mean Nadella’s leadership will be without challenges. “He has been steeped in the corrosive practices of the Steve Ballmer regime and will be less able to bring a fresh outlook to the company,” Kay says.
Microsoft has had only two CEOs in its history: Gates, who co-founded Microsoft in 1975, and Ballmer, who joined the Redmond, Washington company in 1980 as its 30th employee and was named CEO in 2000. Gates, currently chairman of the board, said last month that his philanthropic efforts with the Bill & Melinda Gates Foundation are his life’s work, but that he would continue to help Microsoft’s board “part time.”
Even so, what role Gates will play in the new regime continues to be the source of speculation. Reuters, citing sources, said Nadella may ask that Gates step aside as chairman and instead focus on helping him with Microsoft’s technology strategy.
‘Tweak the Model’
“Nadella would likely be a “tweak the model” leader rather than a ‘transformational’ CEO but, in our view, would likely push Microsoft further into the cloud computing era given his current focus on Azure and he could shift Microsoft’s focus even more to the non-PC enterprise business, which has been driving the overall company’s growth for some time,” said Karl Keirstad of Deutsche Bank. “The front-runner appears to be Satya Nadella as he most closely fits the mold of having depth/vision on the product side as well as strategic decision-making,” noted Citi analyst Walter Pritchard.
While he isn’t the only Microsoft insider to be considered — Skype lead Tony Bates, Chief Operating Officer Kevin Turner and Nokia CEO Stephen Elop have also been touted as potential successors to Ballmer —last week, Re/code, Bloomberg News, Reuters and others said the board, which had narrowed down its search from more than 100 candidates, was in the final stages of talks with Nadella, 46, a native of Hyderabad, India
“In turning to Nadella, the company would get an enterprise-technology veteran who joined Microsoft in 1992 and has had leadership roles in cloud services, server software, Internet search and business applications,” Bloomberg said. “As president of Microsoft’s server business, Nadella boosted revenue to $20.3 billion in the fiscal year through June, up from $16.6 billion when he took over in 2011. That unit became cloud and enterprise when Ballmer overhauled Microsoft’s structure in July to focus the company on devices and services.”
“Nadella is praised for his role in overseeing growth in the company’s cloud computing and Bing search engine business, and as a technologist with a talent for marketing,” Reuters said. “Critics say he failed to halt Google Inc’s dominance in the search engine business. They say Microsoft’s entry into the cloud-computing arena was late and clunky, allowing Amazon.com Inc to set the standard in providing online computing platforms for companies.”
The search for a successor is being led by a special committee of Microsoft’s board, and chaired by John Thompson, the lead independent director. It includes Gates, Chairman of the Audit Committee Chuck Noski and Chairman of the Compensation Committee Steve Luczo, who is CEO of disk driver maker Seagate. Thompson said in a December blog post that the board planned to announce Microsoft’s new leader in the “early part of 2014.”
“At the end of the day, in terms of someone who understands Microsoft, that people will follow and knows about one of the most critical areas of their business, the cloud, Nadella is the only guy,” says tech industry analyst Rob Enderle of the Enderle Group. “Microsoft is not in any danger of going under. They’re performing very well, but they’re not performing well in some critical areas. They don’t need someone who’s going come in and make big changes because that might break what’s working.”