I can't let this opportunity go. Microsoft's (MSFT) shareholder meeting was held yesterday. As reported by Shira Ovide in today's Wall Street Journal "One shareholder expressed frustration about the 'pitifully stagnant' Microsoft share price."
As I posted yesterday, "Steve Ballmer took over Microsoft on January 1, 2000. The price of Microsoft's stock was around $60 per share. On November 18, 2013, a share of Microsoft stock was in the $37.00 to $37.50 range. The amazing thing is that the stock dropped below 40 by the middle of the year 2000 and has never been that high since."
Mr. Ballmer replied, the Journal article informs us, "I don't know how to answer your question." To me, it is the responsibility of the chief executive officer of a company to have an answer to that question.
Shira Ovide writes, "Mr. Ballmer … said Microsoft's profits have more than tripled during his 13-year tenure, but the share price has fallen nearly 40 percent."
Furthermore, as I reported in my post, Microsoft has earned a return on equity after taxes of more than 15 percent for the entire period that Mr. Ballmer has been at the steering wheel of the company. These data can be interpreted to indicate, in the terms of much economic research, that Microsoft has a sustainable competitive advantage in the marketplace.
Why hasn't the stock market reflected this in the price of Microsoft's share price? In other words, Mr. Ballmer's response can be stated in another way: "The market doesn't understand us!" This, to me, is where a disconnect seems to exist.
In terms of personal experience, I have done corporate turnarounds … three of them to be exact. Let me just add that all three of them were successful.
In each of the turnarounds I encountered in the former leadership of the companies the same attitude expressed by Mr. Ballmer relative to the price of the company's stock: "The market doesn't understand us!" In each case, I came to the conclusion that was succinctly expressed by Stephen Covey: "If you think that the problem is out there … that is the problem."
This has led me to take the position that one needs to try and understand what "the market" is trying to say and see what the management needs to do in order to correct the situation and achieve a higher market valuation. The "market" may be wrong (and I will write something on this below) but my advice is to start out assuming that the market may be correct and learn from what the market is telling you.
We can talk all we want to about what Microsoft is doing right and what it is not doing right … about the new Xbox One videogame and the Surface tablets and about the acquisition from Nokia (NOK). The fact still remains that the Microsoft performance has changed over the past five years or so. The ROE has dropped from the mid-40s in 2007 and 2008 to the 30s in the 2009 through 2012 period, to the 20s.
Now, these are all very good numbers. But, they are declining. Look at the direction, not the level.
Second, different measures of market share have been dropping over the past five years, particularly since the introduction of Android. These declines don't seem to be abating.
Third, there is significant new research that has been forthcoming that indicates that the way "markets" were defined in the past is no longer relevant to vibrant, innovative product spaces. Not only are the lines dividing markets fuzzier than ever before, it is now harder to identify exactly who your competitor is. The idea of "markets" has given away to the concept of "arenas" of competition.
If one takes the approach that "the market" knows very well what is going on at Microsoft then one has to take the stance that a change needs to be made at the very top. Microsoft needs a new leader and one that will bring in a new culture. Microsoft needs someone who believes that the problem may be inside Microsoft; that the problem is not that the market doesn't understand what Microsoft is trying to do.
If Mr. Ballmer doesn't understand why the price of Microsoft is where it is and why it has been at this level for most of his tenure as Chief Executive Officer … then Mr. Ballmer, I believe, certainly has to go. Microsoft achieved a position of sustainable competitive advantage and lived off of that position for many years … Mr. Ballmer's years. What Mr. Ballmer did during those years, the market seems to have said, was basically keep up the same business and organizational model while the environment and product markets were changing around him. Unless things change inside Microsoft, the share price of Microsoft will not change.
The market could be wrong … and it often is. This is how someone like Warren Buffett and others like him can succeed. I believe that a lot of money can be made in finding places where "the market" is wrong. But, my suggestion is to start off assuming that "the market" is correct and try and find out WHY the market is correct. Only after extensively studying the situation and failing to find WHY the market is correct … can one start to look at the other possibility … that the market is wrong.
I happen to believe that in the case of Microsoft, "the market" has been correct. Because of this I believed that Mr. Ballmer had to depart. I further believe that Microsoft can be a very good investment for the future. But Microsoft must now find the CEO that understands current product market trends and the evolution of computing and is capable of building a culture that can move with or lead these developments. Microsoft has the human and financial resources to regain its position. The Microsoft search committee must understand this and produce the leader that Microsoft needs.
Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
As I posted yesterday, "Steve Ballmer took over Microsoft on January 1, 2000. The price of Microsoft's stock was around $60 per share. On November 18, 2013, a share of Microsoft stock was in the $37.00 to $37.50 range. The amazing thing is that the stock dropped below 40 by the middle of the year 2000 and has never been that high since."
Mr. Ballmer replied, the Journal article informs us, "I don't know how to answer your question." To me, it is the responsibility of the chief executive officer of a company to have an answer to that question.
Shira Ovide writes, "Mr. Ballmer … said Microsoft's profits have more than tripled during his 13-year tenure, but the share price has fallen nearly 40 percent."
Furthermore, as I reported in my post, Microsoft has earned a return on equity after taxes of more than 15 percent for the entire period that Mr. Ballmer has been at the steering wheel of the company. These data can be interpreted to indicate, in the terms of much economic research, that Microsoft has a sustainable competitive advantage in the marketplace.
Why hasn't the stock market reflected this in the price of Microsoft's share price? In other words, Mr. Ballmer's response can be stated in another way: "The market doesn't understand us!" This, to me, is where a disconnect seems to exist.
In terms of personal experience, I have done corporate turnarounds … three of them to be exact. Let me just add that all three of them were successful.
In each of the turnarounds I encountered in the former leadership of the companies the same attitude expressed by Mr. Ballmer relative to the price of the company's stock: "The market doesn't understand us!" In each case, I came to the conclusion that was succinctly expressed by Stephen Covey: "If you think that the problem is out there … that is the problem."
This has led me to take the position that one needs to try and understand what "the market" is trying to say and see what the management needs to do in order to correct the situation and achieve a higher market valuation. The "market" may be wrong (and I will write something on this below) but my advice is to start out assuming that the market may be correct and learn from what the market is telling you.
We can talk all we want to about what Microsoft is doing right and what it is not doing right … about the new Xbox One videogame and the Surface tablets and about the acquisition from Nokia (NOK). The fact still remains that the Microsoft performance has changed over the past five years or so. The ROE has dropped from the mid-40s in 2007 and 2008 to the 30s in the 2009 through 2012 period, to the 20s.
Now, these are all very good numbers. But, they are declining. Look at the direction, not the level.
Second, different measures of market share have been dropping over the past five years, particularly since the introduction of Android. These declines don't seem to be abating.
Third, there is significant new research that has been forthcoming that indicates that the way "markets" were defined in the past is no longer relevant to vibrant, innovative product spaces. Not only are the lines dividing markets fuzzier than ever before, it is now harder to identify exactly who your competitor is. The idea of "markets" has given away to the concept of "arenas" of competition.
If one takes the approach that "the market" knows very well what is going on at Microsoft then one has to take the stance that a change needs to be made at the very top. Microsoft needs a new leader and one that will bring in a new culture. Microsoft needs someone who believes that the problem may be inside Microsoft; that the problem is not that the market doesn't understand what Microsoft is trying to do.
If Mr. Ballmer doesn't understand why the price of Microsoft is where it is and why it has been at this level for most of his tenure as Chief Executive Officer … then Mr. Ballmer, I believe, certainly has to go. Microsoft achieved a position of sustainable competitive advantage and lived off of that position for many years … Mr. Ballmer's years. What Mr. Ballmer did during those years, the market seems to have said, was basically keep up the same business and organizational model while the environment and product markets were changing around him. Unless things change inside Microsoft, the share price of Microsoft will not change.
The market could be wrong … and it often is. This is how someone like Warren Buffett and others like him can succeed. I believe that a lot of money can be made in finding places where "the market" is wrong. But, my suggestion is to start off assuming that "the market" is correct and try and find out WHY the market is correct. Only after extensively studying the situation and failing to find WHY the market is correct … can one start to look at the other possibility … that the market is wrong.
I happen to believe that in the case of Microsoft, "the market" has been correct. Because of this I believed that Mr. Ballmer had to depart. I further believe that Microsoft can be a very good investment for the future. But Microsoft must now find the CEO that understands current product market trends and the evolution of computing and is capable of building a culture that can move with or lead these developments. Microsoft has the human and financial resources to regain its position. The Microsoft search committee must understand this and produce the leader that Microsoft needs.
Disclosure: I am long MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)