You would think after reading the wide-ranging indictment of Microsoft CEO Steve Ballmer in the technology and business press, he had run Microsoft into the ground and driven his shareholders bankrupt, the way past managers of, say, Enron or Lucent Technologies Inc. had done. These people are wrong — and clueless.
Ballmer announced he was retiring last week. The stock went up, prompting everybody to mock him. But be careful what you wish for, because Ballmer’s reign wasn’t that bad.
Am I crazy? No. Imagine you are running a company. Your job is to build value for the shareholders. That measure, if you are Warren Buffet, is book value. Microsoft’s book value almost doubled in the last five years. Its cash hoard grew from $32 billion to $77 billion. Net income grew from $14 billion to $22 billion annually.
From $32 billion to $77 billion in cash in five years! These are not the numbers of a CEO grown irresponsible, or even moderately incompetent. If you were running a company and grew profits by 57%, tripled the amount of cash on the balance sheet and doubled the book value, would you feel like the public had the right to attack you? What’s the problem, exactly?
As CEO, Ballmer upheld his primary responsibility, which was to grow the company’s profitability and balance sheet. He did that.
The problem is that too many people refer to Microsoft’s stock price and compare it to, say, the bubble valuations of 2000. That’s more an indictment of our dysfunctional financial system than it is of Steve Ballmer.
On the technology front, the criticism is that Microsoft missed tablets, missed mobile, e.t.c. But it is very rare that a technology company of a prior generation catches the next big move in technology. This is natural, because the company becomes large and less nimble as it grows, and its installed base is based on the last technology paradigm (in this case, Microsoft’s base was PCs and client-server networking). It is constantly battling more nimble and wiley insurgents, ready to take it on.
Look at companies like Blackberry, Novell Inc., or Lucent Technologies. These were once glamour technology companies that missed the “next wave” — but at the same time completely screwed up their legacy businesses and imploded. They destroyed value, in the end.
Microsoft, under Ballmer, did not do that. Over the last decade, Ballmer presided over a company that gradually diversified into other businesses such as gaming, Internet, and media. Its core business, Windows server and applicaitons, remained strong. It grew a decent cloud applications business.
The fact is, maintaining a technology franchise over the course of many decades is incredibly difficult, nearly impossible. Very few companies have done it. Think back over the last 3 decades and name a technology company that has survived many waves of change.
One name you might think of is IBM. If you look at a company like IBM, it has morphed into a consulting and services business — it sells very few mainframes and typewriters anymore — which is indicative of what a giant technology company has to do to survive.
But the comparison of Microsoft to IBM is apt, because Microsoft has arguably done better than IBM over the long haul. Microsoft has a market capitalization of $290 billion. IBM’s is $200 billion. Microsoft’s total stockholder equity is $57 billion. IBM’s is $29 billion. Microsoft is a more valuable company.
This is just a demonstration of how perceptions can be wrong. The fact is that Steve Ballmer made some mistakes, but he built up a fortress balance sheet in the face of an onslaught of scary competitors such as Google, Oracle, and others. Although Microsoft made some deals that could be rightfully criticized, such as the $8 billion acquisition of Skype, overall it has been pretty conservative with shareholder cash.
Is that so terrible? Not at all. Given the history of the technology business, Microsoft could have destroyed value, rather than creating it. Ballmer can retire knowing he did well to preserve and build the value of one of the world’s most successful companies, and the successor has many resources and options in the next phase. He’s left the next CEO a very strong company with tons of options. Let’s see how that person does.