Why Nadella Was the Best Choice for Microsoft CEO

Microsoft names Satya Nadella, a 22-year company veteran, to be its third CEO.

Feb 4, 2014 at 7:00PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks recovered some of yesterday's losses, as the benchmark S&P 500 index gained 0.8% on Tuesday, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 0.5%. Shares of Dow component Microsoft (NASDAQ:MSFT) underperformed, losing 0.4%, even as the company announced the appointment of insider Satya Nadella as its new CEO (in fairness, shares outperformed on Friday on news that his appointment was imminent).

Nadella

Microsoft CEO Satya Nadella. Source: Microsoft.

The rationale for going with an outsider to replace Steve Ballmer as Microsoft's CEO was excellent. The software giant has only had two CEOs: co-founder Bill Gates and Ballmer, who was hired by Gates out of business school in 1980, five years after the company was founded.

Both men were not just steeped in Microsoft's culture; they were its culture -- one that was caught flat-footed by several critical shifts in the technology landscape that have sprung from the development of the Internet (search, Web-enabled applications, the shift from PCs to mobile devices, etc.).

However, it now appears clear that Microsoft, as an organization and a culture, was not ready to put an outsider at the helm. That is perhaps disappointing to some shareholders, but there are undeniable advantages associated with selecting a "company man."

Microsoft is a sprawling organization with an aggressive corporate culture -- not an easy environment for an outsider to come into, particularly when they are tasked with creating Microsoft 2.0 at a critical juncture (of course, one could argue that executives at this level are paid a lot of money to take on difficult tasks). For the right insider, knowing the ropes and being able to hit the ground running is extremely helpful.

Is Nadella the right insider? From what we know about him, his background and experience at Microsoft, the signs are encouraging. Armed with two degrees in engineering and a stint as head of R&D for Microsoft's Online Services division, Nadella brings a technological savvy to the role that his predecessor lacked. Still, Nadella is a businessman: The Wall Street Journal reports that even as far back as his undergraduate days in India, Nadella told a classmate that "he wanted to get involved in marketing at a software company."

Furthermore, before coming CEO, Nadella was head of the Cloud and Enterprise Group -- a growth engine for Microsoft. In that role, he's had the chance to observe the changing dynamics of the enterprise software market as companies increasingly move to hosted solutions -- i.e., corporate users access software hosted on hardware that is maintained by an outside party.

Finally, I'm impressed that he effectively negotiated a new role for Bill Gates, that of technology advisor -- Gates will no longer be chairman of the board. That position goes to lead independent director John Thomson. While Nadella paid tribute to Gates in his statements and his first companywide email, this board shake-up is, in my view, essential to giving Nadella the latitude to make the necessary changes at Microsoft.

Speaking of his companywide email (you can read it here), pundits are poking fun at it for being long on lofty, big-picture ideas and buzzwords and short on specifics. This does not trouble me -- was anyone really expecting a laundry list of specific actions? As far as its references to "making the world a better place," a shot of idealism from the top isn't harmful -- nobody bats an eye when the leadership of Facebook or Google uses similar language.

In time, shareholders will need to judge Nadella on results; for now, however, they ought to give him the benefit of the doubt.

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Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends Facebook and Google and owns shares of Facebook, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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