Above The Fray

The Dangers of Baton Passing

I am always amazed at how vilified Steve Ballmer, the CEO of Microsoft, is by investors and the media. From what is written and said, you could easily infer that he has driven Microsoft into bankruptcy during his time at the helm. When he recently announced that he would be retiring soon, investors cheered and the stock price advanced sharply. Steve Ballmer benefited personally to the tune of about $700 million and quipped with the media that he wished he could announce his retirement again the next day. I have been puzzled by this vilification and lack of respect for Steve Ballmer. We have been shareholders since November of 2008 and it has been a wonderful experience for us. The share price has more than doubled from where we first purchased shares and the dividend has increased significantly since that time.

I thought it might be useful to examine the long term record of Microsoft during Steve Ballmer’s tenure to see if there might be some clues as to why he is so universally distained by investors and the media. At Microsoft’s last investment analyst day held in September, Steve Ballmer actually presented a comparison of his performance against other companies in the technology space. I present a condensed version below:

 

(In $ Billions) Google Apple Microsoft
Profit, Last 10 Years 69 175 220
Profit, Last 5 Years 54 161 129
Cash Returned, Last 10 Years 1 29 191
Cash Returned, Last 5 Years 1 28 71
Enterprise Value 251 292 216

 

Does Steve Ballmer seem like a failure to you based on these numbers? I certainly don’t see it. Over ten years, Microsoft has delivered up significantly greater profits than either Google or Apple. While not matching Apple over the last five years, Microsoft’s profits were still gargantuan and soundly thrashed Google’s profits. Has Microsoft returned cash to shareholders through dividends and share repurchases? In spades! Neither Apple nor Google has returned cash to shareholders at anywhere close to the rate of Microsoft. Despite this amazing track record of profitability and returning cash to shareholders during Steve Ballmer’s tenure, the share price languishes and trades at about a 15% discount to Google and over a 25% discount to Apple. Something seems out of step here!

If it can’t be blamed on his performance, what reasons are there to explain this ongoing vilification of Steve Ballmer? Clearly, his track record is not perfect. It is true that Microsoft has been slow to adapt to the mobile world. It is running distantly behind in software for smartphones and tablets. It is true that it is behind Google in search. But Microsoft still dominates office productivity software and has established a powerhouse with its XBOX franchise. It is also true that Microsoft is among the leaders in the emerging field of cloud computing.  So, I just can’t say that Steve Ballmer has totally missed the boat on new product development even though he was late to mobile. While I admire his track record, I admit that some aspects of his personality are not my cup of tea. Just search “Steve Ballmer Monkey Dance” on YouTube and I think you will understand what I mean.

But I really believe that biggest reason why Steve Ballmer is so vilified by investors and the media is because the share price is less today than it was the day the baton was passed to him by Bill Gates. Is this fair? I don’t think so. Steve Ballmer has led Microsoft to double digit per annum growth in revenues and earnings during his tenure. While spending considerable sums on both research and development and making many acquisitions, he has still managed to return significant cash to shareholders. Isn’t that what a good CEO is supposed to do…..allocate capital effectively? I would suggest that Steve Ballmer’s biggest failing is that he accepted the job when the share price was flying high during the tech bubble. Despite excellent operational success and effective overall capital allocation, the share price is now at a discount and below where it was when he took the job. In my judgment, the vilification of Steve Ballmer is not a story of failed performance and leadership but rather a cautionary tale about the dangers of baton passing.

 

“Above the Fray” is a regular blog written by Jeffrey Stacey, Chairman and CEO of Stacey Muirhead Capital Management Ltd., which discusses items of interest related to investing, finance and business. This is not a solicitation.

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2 Comments

  1. Gerry Hooper says:

    No argument that Microsoft has had excellent operating results, The key question is “where is the future?” The criticism of Steve Ballmer is that he has not painted a clear strategic vision.

    • Jeffrey Stacey says:

      Gerry;
      Thank you for your comments. I agree with you that Steve Ballmer has not done a good job at articulating his strategic vision for Microsoft over the last decade. I would also suggest that Google has not been particularly adept at this either.