The Ecstasy of The Evil Empire

There's A Coup Brewing At Microsoft
Peter Lauria, The Daily Beast | Jul. 22, 2010, 9:28 AM

Senior Microsoft executives, disenchanted with the company's stagnant stock, have been secretly discussing how to kick chief Steve Ballmer, and maybe the board, to the curb.

An emotional tribute to his 30 years of service nearly brought Microsoft's testosterone-fueled CEO Steve Ballmer to tears yesterday in front of more than 10,000 employees gathered in Atlanta for the software giant's annual global sales meeting.

"He was rendered completely speechless," a tweet from one of the conference's attendees reported. "Incredibly intense and moving experience."

According another Microsoft executive at the conference, there may be a reason for the drama other than gratitude: Ballmer may not be at Microsoft when next year's event rolls around.

"It felt like it could have been a sign of his last mgx [Microsoft Global Experience]," wrote this insider in a text message to me. "A farewell?"

Indeed, this executive and several other sources close to Microsoft say that there is a growing resentment among a faction of certain executives inside the company who blame Ballmer for the years-long stagnation in Microsoft's stock price.

Their argument, according to these sources, is that Microsoft's overall financial performance has been solid—analysts expect the company to show continued earnings improvement when it reports second-quarter results today—it has scored some strategic wins with the Yahoo search deal, Xbox, and Windows 7 release, and is sitting on a cash pile of more than $20 billion.

But instead of a steadily rising stock price, Microsoft shares have fluctuated wildly over the last few yers, seemingly unable to break out of the mid-$20s for any significant length of time.

After what Citigroup analyst Walter Pritchard dubbed an "inline or better" first quarter, for instance, Microsoft shares traded down 9 percent. The company's shares started the year at $30.67 and have since dipped to $25.12 to close trading yesterday.

Sources say the talk around Microsoft's Redmond, Washington, headquarters—which has grown increasingly louder ever since Apple surpassed Microsoft in market capitalization--is that the company's stock suffers from a "Ballmer discount" and that the CEO is on the clock to significantly move the needle on its share price over the next two or three quarters or face a potential move to oust him.

"Ballmer is on the list of mega-executives under pressure," says a banker who has negotiated deals for Microsoft. "If he was asked to leave the building, I suspect there would be more happy than unhappy people."

A representative for Microsoft, citing a quiet period ahead of today's earnings call, declined comment for this story.

Ballmer still enjoys strong support from many executives inside Microsoft and among those who do business with the company, and several sources dismissed the notion of his ouster as little more than wishful thinking among a disenchanted but vocal minority within an organization that employees nearly 100,000 people.

Under Ballmer's watch, Microsoft's revenue swelled from $23 billion when he took over in 2000 to $54 billion today. Earnings have grown to $14.6 billion from $9.4 billion.

The company still dominates the PC market, consumers have sided with the Xbox in the console gaming wars, and its Bing search engine is slowly gaining traction with users. And Ballmer has managed costs aggressively, particularly during the recession, which Wall Street analysts love to see.

There are also two powerful intangibles that will make it difficult for any group, however sizable, to remove Ballmer: Microsoft's board supports him unwaveringly, and there's no obvious successor that could easily slide into his post.

"I can't imagine the board ever going hostile on him," says one former high-ranking Microsoft executive who remains close to the company.

The problem for Ballmer is that Microsoft is essentially an afterthought in technology's hot growth areas of mobile, devices, search, and cloud computing.

The company's smart phone efforts have been feeble—its decision to shut down the KIN offering after 48 days was utterly embarrassing.

On the device side, the Zune has elicited more jokes than sales. And while Bing grew 24 percent over the last year, Google remains the market leader by a dominate margin.

Of Microsoft, one prominent technology CEO who asked to remain anonymous says, "They are irrelevant down in Silicon Valley."

Adds another Silicon Valley entrepreneur who has worked on projects for Microsoft: "They aren't innovating enough, and without innovation where does the growth come from?"

According to the Microsoft insider at yesterday's conference, Ballmer's hard-charging management style has also caused friction in the senior ranks.

"Under Bill [Gates], Ballmer was the clear No. 2, but there were a lot of two-and-a-halves behind him," says this source. "That created an open dialogue and a lot of checks and balances. Now, the place is run more like a dictatorship."

Indeed, while retirement was the official reason given for the recent resignation of longtime entertainment group head Robbie Bach, who is just 48 years old, this source said his leaving had more to do with the fact that Bach and Ballmer differed on the direction of Microsoft's device platform.

Bach did not return several calls for comment.

Taken together, an autocratic leader and a flatlining stock price are powerful motivators for a coup d'etat.

After all, many of Ballmer's minions have their wealth tied up in Microsoft stock options and it is quite disconcerting for them to look at a 10-year chart that shows the company's share price of $48.93 when Ballmer took over in January 2000 now down to $25.12. (for the math-challenged, that's a nearly 50 percent loss in value over the last decade).

"There's not a lot of love for a $25 stock price, and there's a lot of restlessness in the company over it," says a source who advises Microsoft.

Even the Microsoft insider agrees, however, that the company isn't likely to make a rash change at the top. Instead, this source says the process will be more subtle.

One option secretly being discussed among the disenchanted is to add board seats or replace current directors at the end of their term with CEO-ready candidates who could both provide Ballmer with guidance and be there to step into an interim role as CEO if he resigns.

Though bringing in an outsider is completely antithetical to Microsoft's uniquely homegrown culture, there is something to be said about bringing in fresh blood, particularly with regards to a stagnating company.

As the Microsoft adviser says, "At the end of the day, someone needs to be held accountable for the loss in shareholder value."

Usually, that person is the CEO.

Peter Lauria is senior correspondent covering business, media, and entertainment for The Daily Beast. This post originally appeared at The Daily Beast and is republished here with permission.

http://www.businessinsider.com/a-coup-brews-at-microsoft-2010-7