On the heels of yesterday’s report that Microsoft has narrowed its short list for possible CEOs to succeed retiring CEO Steve Ballmer, veteran Microsoft analyst Rick Sherlund, with investment bank Nomura, is predicting that Alan Mulally will be named Microsoft’s new CEO by December.
Based on his conversations with industry contacts, Sherlund said, he believes the three top candidates being considered by Microsoft’s search committee are Ford CEO and former Boeing Commercial Airplanes CEO Mulally, Boeing chairman and CEO James McNerney, and Tyco chairman and former Tyco CEO Edward Breen. Sherlund does not believe any internal candidates are at the top of the short list — including Nokia Devices & Services head Stephen Elop, who is expected to return to Microsoft once Microsoft’s acquisition of Nokia if finalized.
And, based on those conversations with industry contacts, Sherlund says, he believes that “consensus has come together that Mulally is the guy.”
Sherlund still believes a co-CEO scenario, in which Mulally is teamed with someone who has more high-tech experience and vision, such as Pivotal CEO Paul Maritz, is ideal.
But, Sherlund wrote in a note sent to investors this morning, “it is probably too much to expect Mr. Maritz to engage in such a big fix undertaking at this point in his long and successful career when he may enjoy more building fresh new generation cloud products.”
In that scenario, Sherlund wrote, Microsoft Chairman Bill Gates “may then step in to assume a temporary, more active role and help out with the product perspective.”
Intriguingly, Sherlund also wrote in his note that he believes Ballmer may decide to leave Microsoft’s board and that Microsoft may consider repurchasing his shares — which represent about 4 percent of the company’s outstanding shares and are worth about $12 billion. (Ballmer is on the slate of board candidates that shareholders will be voting on at the annual shareholders meeting Nov. 19.)
His thinking behind the idea that Ballmer might leave the board, Sherlund said in an interview, is that once a new CEO is in place, the board will probably scrutinize the strategic mistakes that have been made — such as missing the rise of smartphones and tablets and not shipping apps sooner for iOS and Android.
“I think it’s reasonable to expect that he would not likely want to remain on the board if his track record is going to be scrutinized and questioned on a very intensive basis,” Sherlund said. “I think that would not be a fun process to go through for Ballmer, when he’s accustomed to being the authority and now his decisions would be overturned.”
Sherlund said he has heard that Microsoft’s buying back Ballmer’s shares is something that is being considered, should Ballmer decide to sell those shares. Doing so would be more orderly, and less disruptive to the stock price, for the company than having the shares out on the open market, Sherlund said, and would also enhance earnings per share by 12 cents.
Still, Sherlund acknowledged, he doesn’t know what would be in it for Ballmer to sell his shares.
Sherlund also has long urged Microsoft to sell off Xbox and Bing, and he reiterates those points again in his note today.
A new CEO would likely scrutinize every aspect of its sprawling business, Sherlund said, and may conclude that the consumer side of the business is not as attractive as the enterprise side. The new CEO may decide to focus the company’s energies on enterprise, selling off its Xbox and Bing businesses.
Sherlund recalled a conversation he had with Bill Gates about 10 years ago in which Gates said Microsoft was creating the Xbox business to prevent Sony from controlling the living room.
“But since then,” Sherlund said, “it’s not so much about the battle of the living room as it is smartphones and tablets and the devices used to access the Internet. I think the reason for being in the market doesn’t exist any more. And I don’t think it’s complementary to anything else that Microsoft does.”
Bing, meanwhile, is slowly gaining traction in the search engine market, though it’s nowhere near to toppling Google’s dominance. Microsoft has also been increasingly using Bing across its operating systems and services, and opening it up as a platform for developers.
Still, the company has already lost $17 billion over the past 10 years with Bing and is currently losing about $1.5 billion a year on it, Sherlund said.
Microsoft doesn’t have to entirely get out of the search market. It could, he proposed, sell Bing to Facebook or work out some arrangement in which Microsoft puts its own search bar everywhere but instead of the search being processed by Microsoft, it’s processed by, say, Facebook, with Facebook paying Microsoft a certain amount for generating the traffic.
“I think at some point, you’ve got to say: Let’s be strategic,” Sherlund said. “You can still be in search. But how important is it? Important enough that you’re losing $1.5 billion a year?”
Sherlund upped his earnings per share estimate for fiscal 2015 from $2.70 to as high as $3.80. He also raised his target price from $40 to $45.
Microsoft shares are trading today at $38.18 — the highest it’s been since the early 2000s.