Nadella outran better-known candidates for Microsoft CEO

Fri Jan 31, 2014 6:24pm EST

By Nadia Damouni and Bill Rigby
    NEW YORK/SEATTLE, Jan 31 (Reuters) - The race to determine
the next head of Microsoft Corp looks to have ended
where it began, with the software giant poised to take the route
of least risk and tap rising internal star Satya Nadella for the
job.
    After a bruising, five-month selection process, the list of
contenders was cut to six serious candidates, with the chief
executive job nearly going to Ford Motor Co CEO Alan
Mulally, an outsider favored by investors lobbying for radical
change. 
    If Nadella wins the day, as expected, it will be for his
innovative work on Microsoft's growing server and tools
business, which provides online computing and storage for
companies, said a source briefed on the search process.
    Nadella is in discussions with the board, and is likely to
ask that Microsoft co-founder Bill Gates drop his chairman role
and help Nadella more closely on technology, two sources said. 
    It is not clear why Nadella might want a role change for
Gates. The presence of Gates and current CEO Steve Ballmer on
the board has deterred some external candidates who feared they
would meet resistance if they want to make fundamental changes,
sources have told Reuters over the past few months.
    Nadella is praised for his role in overseeing growth in the
company's cloud computing and Bing search engine business, and
as a technologist with a talent for marketing. Critics say he
failed to halt Google Inc's dominance in the search
engine business. They say Microsoft's entry into the
cloud-computing arena was late and clunky, allowing Amazon.com
Inc to set the standard in providing online computing
platforms for companies
    It remains unclear whether the 46-year old Indian-born
executive will meet some investors' desire for more radical
moves at the software maker, after Ballmer announced in August
that he planned to retire.  
    "From the technical side, Mr. Nadella is a good choice,"
said Rick Sherlund, an analyst at Nomura who publicly lobbied
for an outside candidate who would shake up Microsoft and
maximize returns to shareholders.
    "We do not want to see a continuation of the existing
direction for the business, so it will be important that Mr.
Nadella be free to make changes," said Sherlund.
    It was just such a desire that made Mulally a front runner
until a few weeks ago, when it became clear that the Ford CEO
and Microsoft's search committee did not see eye to eye.
    "If (Mulally) had played his cards differently, it could
have turned out differently," sources said of the Ford CEO,
pointing to his failure to present a detailed plan to the board.
The move weakened support for him among Microsoft's directors,
they said. 
    Mulally took himself out of the running once it became clear
that Microsoft had cooled, the sources said. 
    
    CANDIDATES DROP OUT
    In the meantime, outsiders Steve Mollenkopf from Qualcomm 
Inc and Ericsson's Hans Vestberg gained
ground, the sources said, as they engaged more openly with the
board. Both ultimately dropped out, Mollenkopf after he was
offered a promotion to CEO at Qualcomm. 
    At the same time, Microsoft refocused on insiders, including
Nadella, Tony Bates - the former Skype boss now in charge of
Microsoft's business development - and Stephen Elop, who is set
to rejoin Microsoft when its acquisition of Nokia's 
handset business closes.
    Microsoft has declined to discuss individual candidates.
Mulally never publicly confirmed his interest in the job but
stated his intention to stay at Ford in early January. Vestberg
and Mollenkopf also declared their intention to stay at their
respective companies. Insiders Bates, Elop and Nadella have not
spoken publicly about the process. 
    Nadella's appointment has not been finalized, the source
cautioned. The Microsoft board is set to meet early next week,
where the terms of the new arrangement will be finalized. 
    Nadella has a strong reputation inside the company. His
inquisitive mind set him apart early in his career, friends in
India say. 
    "Satya is by far the best internal choice," said Brad
Silverberg, who was in charge of Microsoft's breakthrough
Windows 95 release and went on to start Seattle-based venture
capital firm Ignition Partners. 
    To other Microsoft observers, Nadella's longevity at the
company suggests that he is not a radical thinker and more of a
political animal.
    "They need and will pick only a bendable guy, who will
preserve the existing culture of saying yes," said Joachim
Kempin, a former senior vice president of Microsoft and a long
time critic of its management.
    
    GATES' ROLE 
    Microsoft shares did not move much after word of Nadella's
likely selection on Thursday after the market close. The stock
closed up 2.66 percent at $37.84 in Nasdaq trading on Friday.
    Some welcomed the possibility of Gates, long seen by Wall
Street as a barrier to change, moving into a more advisory role
for Nadella. That could pave the way for lead independent
director John Thompson to chair the board and take care of
governance and managing investors, an area largely ignored by
Ballmer and Gates. 
    Nomura's Sherlund was not certain, however, that Thompson
would be any more amenable to Wall Street. 
    "In our conversations with Mr. Thompson, he has not appeared
receptive to taking steps to enhance shareholder value through
accelerated share repurchase, cost cutting and better focusing
the business," said Sherlund. "This could be disappointing for
investors, and it could take time for ValueAct to change the
dynamics on the Board to effect a change in thinking with regard
to shareholder value."
    Activist investor ValueAct took a $2 billion stake in
Microsoft last year and immediately began campaigning for
Ballmer's ouster. Microsoft offered the firm a seat on the board
last year.
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article