It seems that Microsoft insider Satya Nadella is the favorite to replace Steve Ballmer as the CEO.  Nadella’s broad set of experiences at Microsoft from Windows to the Cloud should position him to have a good understanding of the technological direction that the company needs to go in.  I also really respect that he has reportedly asked for Bill Gates to have a more active role in contributing on the technological side, but I do doubt that Gates will comply.  Perhaps it will spur a change in the Chairmanship, which seems like a reasonable thing because Gates’s number one focus is rightly on his extraordinary philanthropic efforts.  The Microsoft job is an extremely exciting one with huge opportunity, but unfortunately Steve Ballmer made a lot of horrible decisions, which Nadella will have to sift through and manage.  I believe that Nadella could benefit from an outsider taking the Chairman job and having an astute CFO to assist on the capital allocation activities of the company, which have been quite pitiful over the last decade.

Steve Ballmer dropped a bomb on the company with his atrocious acquisition of Nokia.  Ballmer’s thinking seems like it is rooted in the early 2000’s when Nokia was the preeminent device maker.  This acquisition will likely prove to be far worse than Google’s expensive acquisition of Motorola Mobility because it comes at a time when Nokia is so beaten up that it offers very little value.  Nokia will generate substantial losses for Microsoft and will tie up capital and be a distraction and if I were the CEO I would look to divest immediately if possible, trying to minimize Ballmer’s damage.

Nadella needs to improve Windows as 8 and 8.1 have not been positively received.  I view the cloud-based subscription model to be a long-term positive for Office and Windows in that they will be able to refresh more quickly and improve the user experience, but the company has to realize that businesses don’t want to deal with distractions like no Start button on Windows.  I’ve used the product myself and it is growing on me but there is still work to be done.  Microsoft’s huge advantage in the operating system wars has certainly dissipated a bit but it can rectify this by taking swift and decisive actions catering to its customers’ needs.   I really like the businesses that Nadella manages in the Cloud and I believe he should funnel significant investment to continue growing in this area.  Smaller acquisitions make a lot more sense than larger acquisitions in this space.

Lastly but very importantly, Microsoft needs an astute capital allocator.  Gone are the days when Ballmer can make horrendously overpriced acquisitions without real consequences.  Microsoft needs to utilize its balance sheet and cash flows to maximize per-share values.  This might mean buying back stock aggressively or small tuck-in acquisitions where it can leverage its R&D and sales force.  Microsoft needs to look closely at its R&D and make sure that various projects are positioned to earn adequate returns on invested capital.  The Surface and Xbox franchises show promise and deserve investment, but the device categories margins are substantially lower so at some point it might make sense to split the company.  I personally have both the Surface Pro 2 and the Xbox One and I believe that if either product had an Apple logo they would be seen as some of the most innovative products in the market, so Microsoft clearly has a promotional or reputational issue that needs to be worked out.  I think it is very likely that Microsoft’s sum of the parts is worth more than the whole but any split is not very likely unless Nadella has a strong capital allocator to work alongside him.  It certainly will be interesting to see how things play out moving forward and if Nadella takes the job, I certainly congratulate him!