Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Governance: Microsoft's Finnish Fiasco; Is eBay Worse?

By Alex Dumortier, CFA - Mar 5, 2014 at 7:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Microsoft's Nokia deal highlights a breakdown in governance at Microsoft.

U.S. stocks were unchanged today, with the benchmark S&P 500 index down just one-hundredth of a percentage point, while the narrower Dow Jones Industrial Average ( ^DJI -1.86% ) lost 0.2%. Corporate governance is the topic of the day in the technology sector, with the publication on Wednesday of an in-depth story by Bloomberg Businessweek highlighting the split that erupted between former Microsoft ( MSFT -1.79% ) CEO Steve Ballmer and the company's board over the acquisition of Nokia's handset unit. Also on Wednesday, combative billionaire investor Carl Icahn told CNBC today that he's "never seen worse corporate governance than eBay ( EBAY -4.38% )"; Icahn owns 2.15% of the company, according to Reuters.

One of the phenomena we witnessed in 2013 -- one which is ongoing -- was the rise of activist shareholders at high-profile, large-capitalization technology names. This month, ValueAct Capital president G. Mason Morfit will take his seat on Microsoft's board. On the basis of the Bloomberg News story, Morfit will make a useful addition to this group, as the board had long been an inadequate check on Ballmer's authority:

For more than a decade, directors gave Ballmer what he wanted. Then two outsiders who joined the board in the first half of 2012 -- Thompson, a former Symantec Corp. CEO, and Steve Luczo, CEO of Seagate Technology Plc -- teamed with others to challenge him.

That wasn't enough, however. The overreach of Ballmer's power is exemplified in the $7.2 billion acquisition of Nokia's handset business, which stunned the industry. Astonishingly, he was able to get the sign-off on the deal despite opposition on multiple fronts, including from one key board member:

Differences emerged over the move into hardware, according to people familiar with the matter. Gates didn't agree that the world's largest software maker should produce its own mobile devices, and Ballmer was hurt that Gates didn't back him, the people said.

But Gates was not the only one who opposed the deal:

Even on Ballmer's senior team, the acquisition wasn't universally popular. In the straw poll, several executives initially voted against it, including Nadella and Bates, according to people with knowledge of the matter. Nadella later sided with Ballmer, while Bates remained staunchly opposed.

(Note: Satya Nadella took over from Ballmer as CEO in February; Tony Bates left the company this week.)

To its credit, the board did reject Ballmer's initial acquisition proposal, which had Microsoft buying Nokia's mapping unit in addition to the handset unit. Unfortunately, however, Ballmer was able, through sheer force of will, to steamroll them into accepting a deal restricted the latter unit. It remains to be proven whether the deal was a mistake, but the acquisition price and Microsoft's track record in hardware do not leave me hopeful that the company will pull it off.

Still, there is at least some semblance of strategic rationale for the deal; the same cannot be said of eBay's 2005 acquisition of Internet telephony provider Skype. That was probably a failure in governance, but is it possible that Icahn has never seen worse corporate governance than at eBay. That sounds hard to believe, given the number and variety of situations he's been involved in; more likely, it's simply an effective soundbite for the cameras.

I happen to agree with Icahn that eBay ought to spin its PayPal unit off, but in a piece published on Wednesday, former PayPal EVP and board member (and now CEO of LinkedIn) Reid Hoffman argues that the two are a good strategic fit:

As competition in the payments sector intensifies, profit margins on all payments systems will likely start trending to zero. As that happens, controlling major commerce platforms will become even more important to payments players, because they'll still be able to create value by building valuable ecosystems on top of them.

Just as Icahn uses hyperbole, Hoffman's presentation of Carl Icahn and activist investors is a caricature, but his discussion of PayPal is worth reading. One strategic rationale that is not in dispute: That of activist investors targeting large, cash-rich technology companies. Expect to see more of this phenomenon in 2014.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,483.72 (-1.86%) $-652.22
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$330.59 (-1.79%) $-6.04
eBay Inc. Stock Quote
eBay Inc.
EBAY
$67.46 (-4.38%) $-3.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.