Microsoft’s Nadella Named CEO to Transform PC Pioneer

Feb 04, 2014 7:22 pm ET

(Corrects long-term compensation in 25th paragraph. For more on Microsoft’s CEO search, see EXT3 <GO>.)

Feb. 4 (Bloomberg) -- Microsoft Corp. named Satya Nadella chief executive officer, tapping an insider steeped in business technology to speed up a turnaround at a software maker that helped usher in the personal-computing age, only to be left behind as the world embraced the Web and mobile devices.

Nadella, 46, is replacing Steve Ballmer effective immediately after a five-month search, Microsoft said in a statement today. Bill Gates, the company’s first CEO, will step aside as chairman, devote more time to product development as a director and continue running his philanthropic foundation. John Thompson, the director who led the CEO search, becomes chairman.

The new CEO, who was born in India and joined Microsoft in 1992, takes over at a critical juncture. Consumers and businesses are shunning PCs in favor of handheld devices made by rivals, sapping demand for Microsoft’s flagship products. Besides playing catchup to the likes of Apple Inc. and Google Inc., Nadella will be tasked with completing strategy changes, begun by Ballmer last year, that include integrating the $7.2 billion integration of Nokia Oyj’s handset unit and turning Microsoft into a provider of services and hardware.

“He’s really the complete package -- he has incredible intellect but he also combines that with a deep curiosity and willingness to learn,” said Doug Burgum, who sold business- software developer Great Plains to Microsoft in 2001 and oversaw Nadella while at the Redmond, Washington-based company.

Fresh Thinking

Nadella emerged as the top internal candidate by late November, people told Bloomberg News at the time. While Nadella brings experience delivering software via the Web and in developing tools for businesses, he’ll need to boost Microsoft’s share in markets aimed at consumers, where rivals have seized the lead. Shareholders are justified in asking whether the Microsoft veteran of 22 years can deliver the same fresh thinking as an outsider, said Daniel Ives, an analyst at FBR Capital Markets & Co.

“He has all the qualifications to take over, but the question for investors is will he be able to change things up,” said Ives, who rates Microsoft the equivalent of a hold.

Much will depend on the role of Microsoft’s board, where former CEOs Gates and Ballmer will remain directors. Nadella is also joining the board as its 10th member. Thompson also brings his experience as Symantec Corp.s’ former CEO and as an executive at International Business Machines Corp.

“During this time of transformation, there is no better person to lead Microsoft than Satya Nadella,” Gates said in the statement.

Sprawling Empire

Nadella inherits a company embattled by a slump in demand for the machines that carry its software. PCs posted their worst decline on record in 2013, when shipments dropped 10 percent and are projected to languish through 2017. Microsoft’s revenue growth has averaged 9.4 percent in the last 10 years, compared with 24 percent during the prior period. In the past decade, Microsoft’s stock has gained 88 percent including dividends, compared with a 91 percent rise in the Standard & Poor’s 500 Index. Microsoft shares fell less than 1 percent to $36.35 at the close in New York.

The new CEO will oversee a sprawling empire of 130,000 employees once the Nokia acquisition closes in the next few months. Microsoft is seeking to remain relevant as consumers turn to mobile devices and the Web to check e-mail and access data, putting the brakes on sales of PCs, the main driver of Microsoft’s Windows and Office software. The acquisition of Nokia is aimed at boosting Microsoft in the smartphone market, where it has a 3.1 percent share, according to ComScore Inc.

Cloud Business

In 2012, Microsoft’s Windows operating system had 19 percent of the consumer-computing market, according to Goldman Sachs Group Inc., down from 93 percent in 2000 when PCs were prevalent. In tablets and smartphones, Microsoft has less than 5 percent share of each market, according to researcher IDC.

Nadella, who was at Sun Microsystems Inc. before joining Microsoft, has worked on business software and services through much of his career. Born in Hyderabad, India, Nadella has a Bachelor’s Degree in electrical engineering from Mangalore University, a master’s degree in computer science from the University of Wisconsin–Milwaukee and an MBA from the University of Chicago.

Nadella, a cricket fan, was “very focused and had very good academics,” said M.A. Faiz Khan, who attended Hyderabad Public School with Nadella. Television broadcast vans were gathered outside the campus, which Nadella visited in recent years to open a robotics lab.

Shantanu Narayen, CEO of Adobe Systems Inc. and Prem Watsa, the CEO of Fairfax Financial Holdings Ltd. who abandoned a takeover of BlackBerry Ltd. last year, are also graduates, according to Khan, who is also a member of the school’s board.

Microsoft Veteran

“The one thing that I would say that defines me is that I love to learn,” Nadella said in an online video. “I get excited about new things, I buy more books than I read or finish, I sign up for more online courses than I can actually finish, but the thing about being able to watch people do great things, learn new concepts, is something that truly excites me.”

Nadella accelerated the move to Internet-based computing and worked to better connect cloud software with Microsoft’s programs for internal corporate networks. Nadella also promoted interoperability with rival programs and helped strike a deal to offer Oracle Corp.’s competing database software on Microsoft’s Windows Azure cloud service.

“Satya has the rare combination of technological depth, business savvy and strong people-leadership skills,” said Jeff Raikes, a former Microsoft executive and CEO of the Bill & Melinda Gates Foundation.

Tech Cycle

As president of Microsoft’s server business, Nadella boosted revenue to $20.3 billion in the fiscal year through June, up from $16.6 billion when he took over in 2011. That unit became cloud and enterprise when Ballmer revamped Microsoft’s structure in July.

Before being named to lead the server unit, Nadella held leadership roles in several different businesses within Microsoft, including Bing search engineering and technical strategy, and the company’s small business applications push.

“I couldn’t be more honored to have been chosen to lead the company,” Nadella said in the statement. “The opportunity ahead for Microsoft is vast, but to seize it, we must focus clearly, move faster and continue to transform.”

Nadella keeps an eye on the moves of nimbler startups and has pushed Microsoft executives to learn from what people outside of Redmond are doing, a person with knowledge of his management approach has said. At a technology conference in Paris in December, he spent time with local startups like video- on-demand company Video Futur Entertainment Group SA.

Top Pick

“He is clearly the best choice to lead the company,” Mason Morfit, the president of activist shareholder ValueAct Holdings LP who is set to join Microsoft’s board next month, said in a statement. “I look forward to working with Satya, Chairman John Thompson and the rest of the Board of Directors to create value for all shareholders.”

Microsoft’s board considered other candidates for the role, including Microsoft Executive Vice President Tony Bates and Stephen Elop, the former Nokia CEO who is rejoining Microsoft as part of the merger. Ericsson AB CEO Hans Vestberg and Ford Motor Co.’s Alan Mulally were also under consideration. Steve Mollenkopf was taken out of contention when he was named CEO of Qualcomm Inc., after Bloomberg News reported on Dec. 13 that he was a candidate.

In Demand

Nadella will receive annual compensation of as much as $18 million as CEO, including a salary of $1.2 million, cash bonus of three times base pay and a stock award worth $13.2 million, Microsoft said in a filing today. He was paid $7.67 million for the fiscal year ended June 30, according to compensation research firm Equilar Inc., which examines corporate filings.

In addition, Nadella will be eligible for long-term stock grants of 150,000 to 900,000 shares that vest in three five-year tranches, ending in 2019, 2020 and 2021. In order to attain maximum payout, Microsoft will have to outperform 80 percent of the companies in the S&P 500. That could be worth as much as $98.1 million, based on the current share price. Nadella already holds 454,062 shares of unvested stock valued at $15.7 million, according to Equilar.

Amazon.com Inc. tried to recruit Nadella to serve as an executive when the world’s biggest online retailer built its cloud products, a person with knowledge of the matter said.

Kerri Catallozzi, a spokeswoman for Seattle-based Amazon, didn’t respond to a request for comment.

Early Days

Gates, who along with Paul Allen founded the company in 1975, was the first CEO. He left that role in 2000, succeeded by Ballmer. Ballmer and Gates were hallmates in a Harvard University dorm before Gates convinced Ballmer to leave business school in 1980 to join Microsoft as its 30th employee.

Ballmer, who initially served as the company’s business manager, almost quit several weeks after joining. Gates convinced him to stay by spinning his vision of a computer on every desk running Microsoft software, Ballmer said in a 2008 speech. With Ballmer playing a key role in many of Microsoft’s negotiations with PC makers, the two eventually made that vision a reality.

Gates said in an online video that he’ll spend part of his time at Microsoft as technology adviser.

“I’ll have over a third of my time available to meet with product groups,” Gates said. “It will be fun to define this next round of products, working together. There’s a lot of opportunity in front of us, and it’s exciting that we have a strong leader to take us there.”

In 2000, when Gates stepped down as CEO, Ballmer took over, with Gates remaining as chairman. Gates, who has since devoted much of his time to his foundation, left day-to-day duties at the company in 2008. Gates said Jan. 21 that he’ll work on philanthropy for the rest of his life.

--With assistance from Margaret Collins in New York and Adi Narayan in Mumbai. Editors: Reed Stevenson, Pui-Wing Tam