Microsoft insider Natella ‘a safe choice’ to take helm, investors say

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Posted: Saturday, February 1, 2014 12:00 am | Updated: 2:24 pm, Thu Jun 5, 2014.

Elevating Satya Nadella to chief executive officer of Microsoft Corp. to replace Steve Ballmer would be met with mixed emotions, investors in the world’s biggest software maker said.

The 46-year-old native of Hyderabad, India, is a cloud computing whiz with the potential to reverse Microsoft’s image as a company stranded in the past, said Chad Morganlander, a fund manager at Washington Crossing Advisors. At the same time, he spent two decades working for Ballmer and Bill Gates and shareholders may be disappointed no outside candidate was found, said Donald Selkin of National Securities Corp.

Microsoft’s board is preparing to make Nadella, the company’s enterprise and cloud chief, its CEO, and is discussing replacing Gates as chairman, according to people briefed on the process who asked not to be identified. Microsoft spokesman Frank Shaw declined to comment.

“It’s a safe choice,” said Kevin Walkush, a business analyst at Jensen Investment Management in Lake Oswego, Ore. The firm oversees $7.2 billion and has 6.7 million Microsoft shares. “There’s a large faction that wants a disruptive tech visionary to take over Microsoft, and that group will probably be disappointed. Another group of people think we need a person like Satya who knows the business because it’s so complex and needs someone that has the inside knowledge.”

Nadella, president of Microsoft’s server business, was picked after several candidates declined to be considered. Ericsson AB CEO Hans Vestberg said he plans to stay at the Stockholm-based electronics maker. Ford Motor Co. CEO Alan Mulally took himself out of the running earlier this month.

“Shares might get a relief rally simply on closure of the issue even if the outcome is less than ideal,” Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $17 billion including Microsoft shares, wrote in an email. “Shareholders were hoping for an outsider with a fresh perspective.”

For investors, Nadella’s challenge is to ignite shares that have been left behind by Google Inc. and Apple Inc. Microsoft has generated a total return of 74 percent since January 2004, compared with a 93 percent gain in the Standard & Poor’s 500 Index.

“That’s why the stock has sagged a little bit lately,” said Selkin, who helps manage $3 billion, including Microsoft, as chief market strategist at National Securities in New York. “He’s a company insider, and I guess people are worried it’s more of the same.”

Moving Gates from the chairmanship would lessen the skepticism about promoting from within, said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, which oversees $63 billion including Microsoft shares.

“It will allow for this internal candidate to be viewed more favorably by the market that he won’t feel the heavy hand of one of the founders and the big shareholder and the previous CEO all collectively perched above him,” Luschini said. “Maybe that was part of the negotiation.”

Microsoft is in the middle of implementing a reorganization and is working to close the acquisition of Nokia Oyj’s handset unit. It introduced the new Xbox One game machine in the holiday quarter and boosted sales of Web-based software such as Azure and Office 365, even as its traditional programs continue to languish along with personal-computer shipments.

Rivals such as Apple have shifted the technology landscape away from Microsoft’s mainstay of personal computers to mobile devices. Ballmer, who said he would retire by August, last year revamped Microsoft’s organizational structure and agreed to buy the Nokia operations for $7.2 billion.

“There needs to be a clean break,” according to Pat Becker Jr., a fund manager at Becker Capital Management, who said that of all the internal candidates, Nadella makes the most sense. His firm, based in Portland, Ore., oversees about $2.8 billion and owns Microsoft shares.

“It wasn’t that Ballmer was bad,” Becker said. “He didn’t do anything wrong, financial results were good under his tenure. But I also think Microsoft is hindered by perception and the CEO and the chairman have to be somebody that people listen to in the tech world.”

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