The Microsoft reshuffle further consolidates CEO Steve Ballmer’s power

July 11, 2013
July 11, 2013

Microsoft announced sweeping changes today to its corporate structure, eliminating the many division presidents the company once employed to focus on software and devices. In a memo called “One Microsoft,” Microsoft CEO Steve Ballmer said the move is aimed at consolidating its sprawling units under one strategy. Ballmer and his most trusted lieutenants will also gain more power from the move, as pressure mounts to reform the company’s strategy.

The moves come amid questions about how long Ballmer, who became CEO in 2000, will remain as head of Microsoft. One possible successor, Skype division president Tony Bates, appears to have been marginalized by the restructuring. He’s been given a lowlier title as head of Business Development and Evangelism Group—a job intended to focus on Microsoft’s existing partnerships with companies like Yahoo, and its mergers and acquisitions strategy.

Although Bates, who joined Microsoft in 2011 after the company acquired Skype, has been praised as a good manager, sources said he was still seen as an outsider at Microsoft. Rumors that he might succeed Ballmer put him in an awkward position at the company, the sources added.

The reshuffle reflects Microsoft’s insular culture; Ballmer is sometimes considered to be a one-man show. The executives rewarded by the reorganization are mainly Microsoft veterans like Julie Larsen-Green, a 20-year employee now in charge of the Devices and Engineering Group, which includes the important Xbox unit. Terry Myerson, who has been with Microsoft for 16 years, was named head of the Operating Systems Engineering Group, which includes operating system work across mobile devices, PCs and gaming consoles.

Investors have long complained about Microsoft’s lagging stock, although shares have risen this year by about 30%. Some of the stock overhang has been blamed on Ballmer. In 2011, hedge fund manager David Einhorn of Greenlight Capital publicly called for Ballmer’s removal. More recently, activist investor ValueAct Capital acquired a $2 billion stake in Microsoft. ValueAct is known for working behind the scenes to push for changes at a company, like it did at Sara Lee, which split into two units in 2011.

ValueAct head Jeffrey Ubben may seek a board seat to advocate for change at Microsoft, a move he has made before with other companies. ValueAct and other Microsoft investors like Capital Research have questioned Microsoft’s continued focus on its weakening consumer business over its enterprise customers, its biggest source of revenue. For example, some investors criticized Microsoft’s recent moves to launch Windows stores within 600 Best Buy locations, even though Microsoft smartphones have a roughly 3% market share in the US.

Ballmer has also fought internally over such issues, for instance, with former CFO Peter Klein, according to sources. Klein opposed spending more on tablet and mobile phone businesses, the sources added. Klein left Microsoft in April, saying he wanted to spend more time with his family.

The reorganization will allow Ballmer to double down on his bet on Microsoft’s consumer business. So far, investors have cheered the restructuring, sending the company’s stock up by about 2% today. But if its consumer business continues to lag behind its corporate one, investor grumbles will get louder.

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