Some big Microsoft shareholders who are happy about CEO Steve Ballmer's imminent exit want his mentor, co-founder and chairman Bill Gates, to follow him out the door.
Reuters reports that three of Microsoft's top 20 shareholders, representing 5% of outstanding shares, want Gates to resign as chairman.
"If both Gates and Ballmer are out, and better capital allocators are in, Microsoft's stock will hit $40 within the next several months," predicts Dan Ferris, analyst at Stansberry & Associates Investment Research.
Dissatisfied shareholders could be upset that Gates would likely stay the course that he and Ballmer have established by pushing for a Ballmer clone to replace his college buddy.
"The bigger issue is, now that Ballmer is being replaced, who will lead?" says Jack Gold, analyst J. Gold Associates. "Gates and Ballmer have essentially veto power over the selection process that not much will change. If you eliminate the existing chair and limit the influence of Ballmer on the selection process, you're more likely to get someone that can take Microsoft in a needed new direction," Gold says. "That would be the best outcome, in my opinion."
Since Gates stepped down as CEO in 2000, giving the reins to Ballmer, Microsoft has launched 16 new businesses that do $1 billion each in annual revenue, including a few growing at double-digit percentages.
Under the Gates-Ballmer regime, Microsoft continues to rake in high profit margins with its Windows and Office software businesses, which require very little capital investment. Selling software licenses doesn't burn through cash like, say, building cars or jetliners.
The company had record revenue topping $73 billion in its last fiscal year, and has stockpiled nearly $70 billion in foreign securities, which it can quickly turn into cash.
But its share price has been on a plateau for more than a decade, because for a giant corporation that generates a mountain of free cash flow, Microsoft is viewed by many on Wall Street as being too stingy in rewarding shareholders.
Free cash flow is the money from core operations that's left over after it's reinvested to maintain and grow the business. Titans such as Coca-Cola, Colgate Palmolive and Johnson & Johnson, which throw off a lot of free cash flow on a consistent basis, typically pay their fair share of taxes and send as much as 60% or 70% of free cash flow back to shareholders in the form of dividends. (continued...)
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