You have to feel at least a little bit bad Microsoft (NASDAQ:MSFT) CEO Steve Ballmer. After all, he did take over from a legendary founder in Bill Gates, and then led Microsoft to grow revenue by nearly four times and increase net income almost three-fold, all while reducing the share count by almost 20% and instituting a dividend program which has returned billions more to shareholders:
The share price is still down 38% from the price the day Ballmer took the reins. Even after factoring in the dividends paid, you'd still be down 25% if you bought that day. Despite all the positives: The steady dividend and the share buybacks that the company's considerable cash flow and profits pay for, there's little doubt that Ballmer's failures -- like failing to get in on mobile early to name the most obvious and glaring -- all point to the company being better off after he's no longer in charge.
Now that the ball is moving forward to replace Ballmer, shouldn't the timing be right to buy? After all, the share price has dropped about 7% in the past month. Why isn't this the perfect time to invest in Microsoft? In a word: uncertainty. Let's take a closer look at why this is such a risk for Microsoft going forward, and why investors should be wary.
Failed acquisitions; reorganizations before retirement -- just more uncertainty
For years, Microsoft had been known for its "silos" where internal divisions were segregated from one another, thus limiting potential innovation in a big way. Add in the long-standing practice of "stack ranking," where some employees were always classified as underperformers despite their efforts, and the culture within Microsoft was far from ideal. This past July -- a mere six weeks before announcing his retirement -- Ballmer announced a "far-reaching realignment of the company that will enable us to innovate with greater speed, efficiency and capability," as the memo put it. The concern, of course, with Ballmer leaving, will this reorg have a chance to make an impact, or actually cost more in time wasted if a new CEO just shakes things up again? Only time will tell on this one.
Large acquisitions in recent years have also been massive wastes, like aQuantive in 2007 for $7.3 billion, and the $8.5 billion paid for Skype in 2011. So far, neither have come close to matching the nearly $16 billion cost. While older, smaller acquisitions have netted successful products like PowerPoint and Visio, these more recent -- and much larger -- acquisitions are enough to make the September 2013 acquisition of Nokia's struggling mobile division unsettling at best. Even with Steven Elop (a former Microsoft Exec before leaving to run Nokia) returning to Microsoft to run the new mobile unit, there's plenty of reason to doubt that Microsoft can make a successful unit out of what Nokia couldn't do, and in a market segment Microsoft has so far failed at penetrating with any strength.
Who's really going to be in charge?
While Ford's Alan Mulally has been rumored as a potential CEO, and his track record turning Ford around and history in Seattle with Boeing is nice, he's not the kind of CEO who would likely want to deal with having both of his predecessors -- in Ballmer and Gates -- sitting on the Board of Directors. There's was reportedly much early strife between Gates and Ballmer when Ballmer took over; with Microsoft facing a serious crossroads as a tech powerhouse and its future direction is still somewhat unclear, any new CEO will need to put their stamp and direction on the company. Rest assured that a board featuring both Gates and Ballmer -- not to mention the potential of activist shareholders -- would add an additional layer of difficulty for any CEO trying to make Microsoft into the company that it needs to be for the next twenty years, much less a strong leader like Mulally.
Cisco Systems (NASDAQ:CSCO) is another tech name that's taken a bit of a beating lately. The share price tumbled more than 15% in the month following its November earnings release, based on real concerns when the company announced that sales in the next quarter would fall as much as 10%. While on the surface it seems crazy to even consider investing in a company telling us sales will be well off, Cisco has several things that play to its advantage:
First, Cisco's core business is providing a means of connecting devices to one another, and providing secure means to do this. With the explosion of mobile computing, and the birth of the "Internet of Everything," where we are seeing everything from the car to the fridge to commercial HVAC units connect to the Web, Cisco's market is only going to continue to grow.
With John Chambers at Cisco since 1991, and CEO since 1995, there's much less certainty around the future direction. Its Board of Directors is stable and also a veritable "who's who" in tech, including the CEO of Salesforce.com, Mark Benioff, and CEO of Motorola Solutions, Greg Brown. Having a stable leadership team and board which is free of the potential strife of activist shareholders or former leaders vying for control, means an easier path forward.
Certainty wins out
Still immensely profitable and successful, Microsoft is in a period of uncertainty. Until a new CEO is in place, and enough time has passed to learn if his or her plan is moving the company forward -- and whether or not the board is helping or hindering -- Microsoft isn't a safe place to invest. Cisco, while having shown a temporary setback, is in a much more predictable place in tech, with strong leadership and a growing market it can capitalize on. Microsoft could become a great company again. But it's way too early to know when -- or if -- that will happen. Cisco is a better place to invest until then.