The headlines for the Wall Street Journal Weekend Edition (August 24, 2013) read regarding August 23rd surprise announcement:
CEO EXIT Sets Microsoft on New Path
Steve Balmer, Who Faced Criticism Over Waning Growth, to Leave Within a Year; Stock Jumps 7%
The thought of a blog post was instantaneous. I’m writing about management and ownership succession/transition planning and on this blog, and then a CEO makes a surprise announcement and Microsoft’s (MSFT) shares jump from $32.39 per share to $34.75 per share, or 7.3%. Was Microsoft really worth $20 billion more following this unscheduled announcement?
Probably not, but the price movement apparently reflected substantial pent-up frustration with Microsoft’s direction, or lack thereof, and its ongoing market share and market capitalization relative to the likes of Apple (AAPL) and Google (GOOG).
Executive Suite Reshuffle
Mr. Balmer is the architect of Microsoft’s relatively new “devices and services” strategy. His announcement was preceded by a reshuffling of the chairs on Microsoft’s proverbial deck:
Microsoft said it would look both inside and outside the company for a replacement as Mr. Balmer remains CEO for up to 12 months. The surprise announcement suggests that there was no planned succession, coming only about six weeks after Mr. Balmer shuffled his entire executive suite with naming a clear No. 2.
No planned succession for Microsoft, one of the leading companies in the world with a market capitalization of nearly $300 billion? What kind of example is that for the boards of other public companies or for the boards of closely held and family businesses? Well, they have been looking, unsuccessfully:
Executives inside and outside Microsoft said change at the top of the company was long overdue. People briefed on Microsoft board deliberations said directors have scouted for years potential successors to Mr. Balmer. But those people said it has been tough to find the right replacement to lead a sprawling company that has only had two CEOs in its history.
The Strategy Unfolds
Just a few days later, on August 30, 2013, Microsoft announced it will acquire the mobile phones and smart phones divisions of Nokia, a further push into the devices and services strategy. The deal was about a $7 billion transaction. However, what the market “gaveth” upon Mr. Balmer’s announcement, it “tooketh away” with the Nokia announcement.
Nokia, which has had substantial problems in recent years, saw its shares jump nearly 50% in pricing. Microsoft shares, on the other hand fell from $33.20 per share to $31.90 per share, or 4.5%. Clearly, the market is questioning the devices and services strategy. While the markets were receptive to Mr. Balmer’s announced departure, they do not appear to be receptive to his continuing that strategy during his lame duck period.
Now, just over two weeks following Mr. Balmer’s announcement, as luck would have it, there has been exactly no net change in Microsoft’s share price. Pre-announcement and as of September 10, 2013: $32.39 per share. The Balmer Premium has vanished. But a lot of money was made and lost during the interim.
6 Thoughts re Inevitable Management Transitions
Let’s set aside the issue of strategy for a later time and focus on the issue of management transition for closely held and family businesses.
Market caps in this sector may not range to $300 billion, but the market caps are very real and very important to their owners. Our clients range in market cap of equity from perhaps low millions to multiple billions.
The situations in this range of companies may differ significantly. What does not differ is that, like Microsoft, they all face important management transitions. For some the transitions are imminent, and for others, less so but coming.
Here are six thoughts or lessons for the owners and key managers of closely held and family businesses:
- Management transitions are seldom easy, and they take time and focus from the right people, including you, your board of directors, key advisers, and, perhaps, certain key insiders. The process was not really initiated at Microsoft in nearly enough time.
- It is important to think about and plan for inevitable management transitions well in advance. While a number of Microsoft insiders were no doubt thinking about the inevitable transition from Mr. Balmer’s leadership, no one was planning effectively. A major management reshuffling just prior to the announcement is evidence of lack of planning.
- Don’t run off your best contenders for succession before you begin to take action.
- Remember that if you are thinking that a management transition might be needed, everyone else knows it should have begun or even happened already. Perhaps that is the cause of the buoyancy in Microsoft’s share price at the Balmer announcement.
- It is difficult for your team to focus on any strategy if all of the members are wondering what you and the board are going to do for too long. What must the top executives at Microsoft have thought about the recent realignment noted above where Mr. Balmer (and Mr. Gates and the entire board) allowed this restructuring without naming a Number 2?
- You and your board have a responsibility to plan for and to implement management transitions in a timely manner. Management transitions are important for your shareholders, your employees, your customers, and, indeed, all of your company’s constituents. Microsoft’s CEO and board have put themselves in a position with a gun to their heads. Mr. Balmer will stay on for another 12 months. What if a successor is not found? What if the internal pressures are so great that a decision is made too rapidly?
Many of the companies I deal with have baby boomer senior managers who own substantial portions of their companies. Let’s put ownership transitions aside for now. Every one of these companies will experience management transitions over the next one, two, five or ten years or so.
Isn’t it better to plan ahead for these critical transitions for the good of your fellow owners, their families, your employees, your customers and on? Of course it is.
So don’t be caught like Mr. Balmer and Microsoft’s board, in a trap with no apparent solution. Read the lessons above and take action. If you want to talk about some of these important issues you are facing, give me a call (901-685-2120).
But don’t expect an automatic 7% increase in your appraisal!