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Spotlight Intensifies on Nadella as Microsoft CEO Frontrunner

The tea leaves continue to point to Satya Nadella as the leading contender to replace Steve Ballmer as Microsoft's CEO. Since yesterday's report that Nadella is the leading candidate, additional reports have surfaced that Bill Gates may possibly cede the chairman's roll to board director John Thompson.

Gates may step down as chairman but yet have more involvement with the company, Bloomberg reported yesterday. Clearly Nadella wasn't the first choice though some believe outside candidates such as Ford CEO Alan Mulally were placeholders for Nadella to eventually lead Microsoft. Mulally earlier this month said he would not leave Ford this year.

Nadella, a 22-year Microsoft veteran, is viewed as a capable and bright technical visionary but lacking any background in running a large business. Critics have advocated that only an outsider can shake things up in Redmond. Nomura Securities analyst Rick Sherlund believes Nadella is a good choice, especially with CFO Amy Hood at his side.

"He's complimented by a very good CFO and I think Amy Hood will do a lot to manage the cost structure and together with some influence on the board like from ValueAct," Sherlund told CNBC this morning.

The ideal scenario in Sherlund's mind was for Mulally to groom Nadella, who would have shaped the company's technical and product strategy. While Microsoft's stock would have gotten a more immediate bump from bagging Mulally, Sherlund has a price target for Microsoft's stock at $45 per share. It was trading up nearly 2 percent at $37.49 at midday today, making it the second most-active stock on the Nasdaq.

Nadella, who grew up in India, has a reputation as a "relentless questioner," who with substantial technical chops, as Reuters noted in this report today. That's a major departure from Ballmer, better known for his marketing prowess.

Would the combination of Nadella and Hood be enough to keep Wall Street happy? "I think the stock will be in a holding pattern here a little bit," Sherlund said. "Initially it traded up, probably under relief that it wasn't some of the other people that people feared would get that job." While he didn't say so specifically, he didn't deny he was referring to Stephen Elop, a onetime Microsoft executive, who was CEO of Nokia and is slated to return to Microsoft as an executive VP after the Nokia deal is finalized. Elop last year was at one time considered a front runner but quickly dropped from contention, while Nadella was preferred for his deeper engineering background.

Critics of choosing an insider shouldn't presume Nadella wouldn't shake things up at Microsoft and Sherlund said he would need to be willing to cut loose-key executives and bring in new talent. Likewise Sherlund said Microsoft needs to revamp its board. "I think the dynamics on this board are about to change pretty radically," he said. "This board has not done a very good job at looking after shareholder value over the last decade and there's a lot of people don't have a lot of experience in the technology field. This is a tech company, they are going to be run by somebody with a tech back ground, and I think they have to allow him to make the changes that are necessary."

Though Ballmer was recently re-elected to the board, Sherlund said he wouldn't be surprised if he exits. Of course, while a decision remains to be made, fluid reports are pointing to an announcement as early next week. And while it doesn't appear the board has made an offer, the focus on this weekend's Super Bowl is cited as one reason not to announce anything sooner.

In case you haven't heard, the Seattle Seahawks (which, by the way, is co-owned by Microsoft co-founder Paul Allen) are going to the big game. Apparently that's the main thing on the minds of employees in Redmond today.

Posted by Jeffrey Schwartz on 01/31/2014 at 12:10 PM


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