Microsoft – Myopic Machinations

The opportunity is at risk from taking the easy option.

• The naming of Satya Nadella as the next CEO could cause some wild gyrations in the share price.
• The market wants Nadella as CEO because it believes that his strategic choice will be to break the company up to focus on just Enterprise (see here).
• This stems solely from his background as the leader of leader of the Server and Tools Business which he has transformed into a $20bn business by moving it into the cloud.
• Hence, the expectation is that if he is made CEO his instinct will be to jettison the consumer assets and refocus the business on Enterprise.
• There is a rationale to this as slow growth and huge losses from the consumer side are keeping Microsoft as one of the cheapest software companies in the market.
• A refocusing would cause a re-rating and upside for investors.
• However, this is a very myopic view and in the long run it is overlooking the long term opportunity.
• Microsoft is very far ahead of all of the other contenders in terms of building the third ecosystem and ditching the consumer business now will end that opportunity.
• Furthermore, innovation and change in Digital Life is starting with the consumer and moving into the enterprise.
• The social networking concept is now an important part of how information and knowledge is shared within an organisation.
• More and more, Enterprise is adapting to the way its employees live their Digital Lives and all of this is beginning in the consumer space.
• Things are getting very blurred as everyone who uses enterprise software is also a consumer.
• Hence, ditching consumer could leave Microsoft blind to what innovation will drive enterprise software opening itself up to greater competition.
• Microsoft has the opportunity to capitalise on having a foot in both camps and this is something that neither Apple or Google have.
• The best part of it is that the strategy is already there. It is just a question of executing it.
• This is where my questions arise.
• Jettisoning consumer is the easy option. Microsoft will be able to remain as the old ivory towers and not much will change.
• Bringing the whole company together to execute a huge strategic shift to become a full range Digital Life provider will take an iron fist and an indomitable will to break down the ivory towers and rebuild them to conform to this strategy.
• Microsoft will have to be turned on its head to achieve this but the rewards will be much greater than a simple re-rating.
• Microsoft could become a growth company once again.
• This is why Microsoft is one of my favourite stocks.
• If Nadella is confirmed as CEO and he does choose the easy option, I will take my bounce and look for something else.