Microsoft Names New CEO: Why The Market's Tepid Reaction Is A Good Sign

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Yesterday, before the market opened, Microsft (MSFT) announced that Satya Nadella would be taking over as CEO. They also re-shuffled the board: Founder Bill Gates will step down as Chairman and will be replaced by John Thompson, while the old CEO, Steve Ballmer will, for now at least, remain a Director. Gates will spend more time on the company and fill a role as “Technology Advisor.” The market was seriously underwhelmed.

MSFT

On a day that saw the broad market arrest recent declines and bounce back a little, MSFT lost ground slightly to close at $36.35. Forgive my cynicism, but if history is any guide, that may be a good sign. When the market perceives underperformance in a company, the general feeling tends to be that radical change is needed and the appointment of somebody like Nadella, with 22 years at Microsoft, is seen as a disappointment. Traders and investors become like sports fans, clamoring for a big name coach or manager after a couple of losing seasons. There are, however, several reasons to believe this will be a positive change for the company.

Leaving the CEO position aside for a moment, the news that Bill Gates is to become less of a figurehead and administrator and focus on product development is, to me, the most interesting piece of news. A re-invigorated, engaged Gates should be a scary prospect for those in competition with Microsoft. As for the appointment of Nadella, there is no doubt that his most recent role as the head of the Cloud and Enterprise group has been a success.

The naysayers would point out that Nadella was also heavily involved in the launch of Bing, but, in my opinion, tasting failure as well as success is a positive for those assuming a leadership role. I remember a story from a while back that Gates himself used to tell incoming executives that if everything they did at Microsoft was a success, they would be a failure. The story may not be true, but the point is that taking risks and dealing with failure is essential to success.

Risk, however, must also be taken with caution. Those who maintained that the slowing growth of the tech giant warranted bringing in a dynamic outsider may want to consider another company that took that direction. In late 2010 and early 2011, JC Penney (JCP) was disappointing investors. As the recovery progressed, slowly increasing revenue and profit were, it seemed, not good enough. What JCP needed, the market concluded was a radical new leader to alter the course. Ron Johnson was just the man! When his appointment was announced on June 14th 2011 the market cheered lustily.

That great big green bar marks the momentous day, as JCP jumped over 16%. The rest, as they say, is history.

There are, of course, instances when such a change has been positive, but the market’s tepid reaction to yesterday’s news is certainly no indication of the future for either Microsoft as a company or of MSFT as a stock.

In the interest of full disclosure I should say that I am long MSFT. I bought at around $25 several years ago and have no intention of selling in the near future. I don’t see MSFT as a stock with phenomenal growth potential at this point, but a yield over 3% with some is a decent long term hold in an environment where the 10 Year Treasury is yielding 2.6% with extremely limited room for capital appreciation.

My reasons for holding onto my MSFT position aren’t sexy and neither was the appointment of Satya Nadella as CEO. In general, however, sexy moves are not always a great idea and I, as a stockholder, applaud Microsoft’s refusal to cave to the short-sighted desire of traders like me. Fixing things that aren’t broken can turn a disappointment into a disaster… just ask those still long JCP.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Business , Stocks

Referenced Stocks: MSFT , JCP

Martin Tillier


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