Ballmer Left With 'Google Envy,' Sinking Stock as Gates Retires
By Amy Thomson
June 27 (Bloomberg) -- Bill Gates today turns Microsoft Corp. over to the sole leadership of Steve Ballmer. There may have been better times for a handoff.
Shares of the world's largest software maker are down 22 percent this year, sales of Windows software are slowing, and an attempt to buy Yahoo! Inc. flopped. And Google Inc. is widening its lead over Microsoft in Internet searches, leaving Ballmer with a case of ``chronic Google envy,'' according to Jane Snorek, an analyst at Minneapolis-based First American Funds.
While Ballmer has been chief executive officer since 2000, founder Gates's retirement as an active chairman will leave his college buddy alone in the spotlight and under increasing pressure to revive the shares, Snorek said.
``The No. 1 judgment of a CEO is the stock,'' said Snorek, whose firm manages $100 billion in investments including Microsoft shares. ``The stock hasn't recovered.''
Reviving the shares may hinge on Ballmer's ability to turn around the online-advertising business. His bid to become the No. 2 contender in the $65.2 billion industry in a single step fell through last month when he and Yahoo couldn't agree on a takeover price.
He risks being left behind if he doesn't move quickly on a new strategy, Snorek said. The Redmond, Washington-based company's online business was its only unprofitable unit last quarter, recording a loss of $228 million. Google's net income rose to $1.31 billion.
``The online services is the big question mark that people will judge him on,'' said Heather Bellini, an analyst at UBS AG in New York who is Institutional Investor magazine's top-ranked software analyst.
Ballmer ``might go down as the CEO with chronic Google envy,'' said Snorek of First American Funds.
Retirement
Ballmer and Gates, both 52, declined to be interviewed. Spokesman Tom Pilla said that while Microsoft sees Web advertising as a ``key priority,'' the company's broader efforts to develop software applications that can be used online hold ``tremendous opportunity.''
Microsoft said two years ago that Gates, who started the company with high school friend Paul Allen in 1975, would end his day-to-day role to spend more time on the charitable foundation he runs with his wife, Melinda French Gates.
Gates will remain chairman, coming in one day a week to work on projects with Craig Mundie and Ray Ozzie, who inherit his software strategy responsibilities.
``I don't ever see Bill stepping 100 percent away from Microsoft,'' said Scott Di Valerio, a former vice president who resigned in October. ``He's part of the core of Microsoft, and I think Microsoft is part of Bill's overall core.''
`All Over'
Microsoft said it surpassed Lotus Development Corp. to become the largest software maker in 1987, and Gates became the world's youngest self-made billionaire, at 31. He had taken the company public and unveiled its first operating system and word- processing program. Today, Windows runs 95 percent of the world's personal computers.
``He made it look so easy, taking over the world with his operating system and making money hand over fist,'' Snorek said. ``To defend Ballmer, he got the company when all that was over, and he's had to look for new ways to grow.''
Ballmer has searched for growth by expanding into video-game consoles, digital music players and Web search engines. While the Xbox game unit has become profitable after six years of losses, Microsoft's Zune music device isn't winning many converts from Apple Inc.'s iPod, and the search engine performs one-sixth of the queries that Google gets.
The most important task now is fighting Google, Bellini said. Microsoft's share of the $21.1 billion market for U.S. Web ads slipped to 6.7 percent in 2007 from 9.6 percent in 2004, according to New York researcher EMarketer Inc. Google's share more than doubled, to 28.4 percent from 13.1 percent.
Google Rivalry
Microsoft intensified efforts to catch Mountain View, California-based Google in the 12 months ended in September 2006 by doubling its Internet workforce and adding features to its MSN business. Microsoft also acquired Seattle-based online marketing firm AQuantive Inc. last year for $6 billion.
In May, Microsoft offered to buy Yahoo for $33 a share, or $47.5 billion. After Ballmer and Yahoo CEO Jerry Yang failed to agree on a price, Microsoft offered to buy just the search unit. Yahoo rejected that bid in favor of a partnership with Google.
``They have to be competitive,'' said Mike Holland, chairman of New York-based Holland & Co., which manages more than $4 billion including Microsoft and Google shares. ``The risk is they don't succeed.''
`Different Objectives'
Microsoft's Pilla said revenue has almost doubled in the past six years and Microsoft has returned more than $100 billion to investors. The company pays a dividend of 11 cents a share quarterly and has repurchased $66.4 billion in shares since 2004.
``We are wrapping up an excellent fiscal year,'' Pilla said. ``Our outlook remains bright and our prospects for growth remain strong.''
Microsoft's broader Internet software effort centers on services that host programs online, outlined by Gates in 1999. The company has created applications for businesses that organize customer, sales and marketing data.
Gates and Ballmer, who met at Harvard College before Gates dropped out to start Microsoft, are the top shareholders. The two together own 13 percent of the shares, according to filings.
``Both men, in many cases, have different objectives from your run-of-the-mill investor,'' said Rob Helm, research director at Kirkland, Washington-based Directions on Microsoft, which follows the software maker. ``There's less concern about short- term results and more concern about being strategically positioned.''
To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net
Last Updated: June 27, 2008 00:01 EDT |
