Greenlight's Einhorn Says Microsoft Should Replace Ballmer

May 26, 2011, 10:02 AM EDT By Dina Bass, Kelly Bit and Saijel Kishan

(Updates with opening shares in eighth paragraph.)

May 26 (Bloomberg) -- Greenlight Capital Inc. President David Einhorn called for Microsoft Corp.’s board to replace Chief Executive Officer Steve Ballmer, saying the software maker suffers from “Charlie Brown management.”

Ballmer is weighing on the company’s share price, Einhorn said yesterday at the Ira Sohn Investment Conference in New York. Even so, he recommended Microsoft shares because the stock trades at a “remarkable discount” to the Standard & Poor’s 500 Index while the business outperforms the average S&P company. Microsoft is Greenlight’s eighth-biggest U.S. stock holding.

“It’s time for Microsoft’s board to tell Steve Ballmer, ‘All right, we see what you can do, let’s give so-and-so a chance,’” Einhorn said. “His continued presence is the biggest overhang on Microsoft’s stock.”

Ballmer, 55, has come under increased scrutiny from shareholders as the company loses market share to Apple Inc. and Google Inc. in mobile phones and Apple’s iPad takes sales from personal computers running Microsoft’s Windows. Last year, the board docked Ballmer some of his potential bonus for falling short in the mobile industry and new forms of computers.

Greenlight, a New York-based hedge fund, added 1.39 million Microsoft shares last quarter, for a total of 9.07 million, according to a filing. The stake is worth $230.2 million. Microsoft’s shares have underperformed the S&P 500 in four of the past five quarters.

Frank Shaw, a spokesman for Redmond, Washington-based Microsoft, declined to comment.

Top Shareholder

Ballmer is the company’s second-biggest shareholder -- with more than 333 million shares, or almost 4 percent. Co-founder and Chairman Bill Gates owns more than 561 million shares, or a 6.7 percent stake, according to Bloomberg data.

Microsoft climbed 30 cents, or 1.2 percent, to $24.49 at 9:37 a.m. New York time in Nasdaq Stock Market trading. The shares declined 13 percent this year before today.

Einhorn, best known for profiting from bets against Lehman Brothers Holdings Inc. four months before the firm collapsed in 2008, is a frequent speaker at the annual Ira Sohn conference. In 2006, he used his speech to discuss his recent purchase of Microsoft shares and to recommend the stock.

Since then, earnings per share have more than doubled and four of Microsoft’s product segments have shown improvement, Einhorn said. The company has also almost doubled its dividend and is now trading at a far bigger discount to the S&P 500, he said.

‘Not Getting Credit’

“Microsoft trades at a remarkable discount,” Einhorn said. “Microsoft is not getting credit for its achievements and prospects.”

Microsoft shares trade for about 9.8 times profit from the past year, or 34 percent less than the price-earnings ratio for the S&P 500. That’s the biggest discount since at least 1992 for the company, according to data compiled by Bloomberg.

Still, Ballmer isn’t taking advantage of Microsoft’s opportunities, Einhorn said. In his criticism, he likened Ballmer to Charlie Brown, a perpetual loser in baseball, football and other pursuits. The cartoon character’s signature lament is, “Good grief!”

“Ballmer’s problem is that he’s stuck in the past,” Einhorn said. “He’s allowed competitors to beat Microsoft in huge areas, including search, mobile-communications software, tablet computing and social networking. Even worse, his response to these failures has been to pour tremendous resources into efforts to develop his way out of these holes.”

Internet Losses

Microsoft’s online services business, which includes the Bing search engine, lost more than $700 million last quarter.

Einhorn, whose hedge fund manages $7.8 billion, criticized Lehman’s accounting during a speech at the same conference in 2008. Four months later, Lehman filed for the largest bankruptcy in U.S. history.

Einhorn said Lehman hadn’t disclosed its holdings of collateralized debt obligations properly and wasn’t valuing its commercial mortgage-related assets based on market prices.

His wagers haven’t always paid off. Einhorn said at the Ira Sohn conference last year that he continues to bet against rating agencies Moody’s Corp. and McGraw-Hill Cos., owner of Standard & Poor’s. Moody’s has risen 79 percent in the past year, while shares of McGraw-Hill have climbed 51 percent.

Back in 2006, Einhorn compared his investment approach to the strategy he uses in fantasy baseball, a game won by assembling the best team of Major League Baseball players. Einhorn said he’s usually reluctant to spend more than $30 on individual players because he only has $260 to buy the whole roster. Still, he said if Alex Rodriguez, then the sport’s most valuable player, were available for $35, he’d pony up.

Microsoft, he said at the time, was similar -- a little higher valuation than the companies he usually buys, but “Microsoft is A-Rod.”

--with assistance from Josh Fineman and Nick Baker in New York. Editors: Nick Turner, Tom Giles

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net; Kelly Bit in New York at kbit@bloomberg.net; Saijel Kishan in New York at skishan@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Einhorn Prods Ballmer as Tech CEOs Exit

May 27, 2011, 5:48 AM EDT By Dina Bass

May 27 (Bloomberg) -- David Einhorn’s call to replace Microsoft Corp. Chief Executive Officer Steve Ballmer adds to the drumbeat for change at the top of technology bellwethers.

Boards at increasingly large hardware and software makers are replacing CEOs to help their companies repel threats from upstarts such as Facebook Inc. and Apple Inc. The aim is to keep from getting left behind in emerging technologies including social networking, mobile computing and the delivery of software over the Internet, via the so-called cloud.

Hewlett-Packard Co., Google Inc. and Advanced Micro Devices Inc. lead technology companies with a combined $265 billion in market value on the Standard & Poor’s 500 Index that have changed CEOs since August. That’s up from companies worth $75 billion a year earlier. Privately held Twitter Inc. replaced its CEO in October, a month after Finland’s Nokia Oyj did the same.

Investors may clamor for new leadership at companies including Cisco Systems Inc. and Research In Motion Ltd., said Bill Coleman, a partner at venture capital firm Alsop Louie Partners in San Francisco.

“The companies that haven’t moved are under a lot of pressure, and one of the first places you look to change things is at the top,” said Coleman, the former CEO of BEA Systems Inc., which was acquired by Oracle Corp. “There are lots of companies like Nokia and RIM and AMD and Cisco that have fallen behind and lost at least some of their competitive edge.”

Ballmer is being criticized as Redmond, Washington-based Microsoft loses market share to Apple and Google in mobile phones and Apple’s iPad takes sales from personal computers running Microsoft’s Windows.

Ballmer Dinged

The board docked Ballmer some of his potential bonus last year for falling short in mobile and new forms of computers.

Einhorn, president of hedge fund Greenlight Capital Inc., said Ballmer has failed to seize on Microsoft’s opportunities and overspent on efforts to remedy shortcomings.

“He’s allowed competitors to beat Microsoft in huge areas, including search, mobile-communications software, tablet computing and social networking,” Einhorn said at a conference this week. “Even worse, his response to these failures has been to pour tremendous resources into efforts to develop his way out of these holes.”

During Ballmer’s 11-year reign as CEO, shares have declined more than 50 percent, even though sales have more than tripled and profit has risen 141 percent.

While investors’ patience with Ballmer is wearing thin, Microsoft’s board may not quickly agitate for change, said Pat Becker Jr., principal of Portland, Oregon-based Becker Capital Management, which holds Microsoft.

‘Losing the Tech World’

“He doesn’t have the investor base and my fear is he’s losing his customer base and losing the tech world in general,” said Becker, whose firm has about $2.5 billion in assets. “The investor base would welcome new leadership, but whether the board wants him to go is a different thing.”

Ballmer’s supporters could point to the company’s sales and profit growth on his watch, said Michael Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge.

“Financially Microsoft has really done quite well,” Cusumano said. “They are still printing money essentially.”

Frank Shaw, a spokesman for Microsoft, declined to comment.

Other boards have shown less resistance to change. Hewlett- Packard directors pushed out former CEO Mark Hurd in August after an investigation found he violated the company’s code of business ethics by concealing a personal relationship with a female contractor.

Hewlett-Packard, AMD, Google

Hurd’s successor, Leo Apotheker, said this month that he inherited a company ill-equipped to win business from companies that want to switch to cloud computing. AMD board members ousted CEO Dirk Meyer in January amid frustration with the company’s lack of progress in chips for tablets.

Google turned to one of its co-founders, Larry Page, 38, to succeed Eric Schmidt, 56, who ran the company for a decade. The move was aimed at helping Google bolster its defenses against Facebook and recapture the entrepreneurial ethos that fostered the creation of the most-used search engine.

Some companies aim for executives who, by dint of age or strategic vision, convey the sense they can cater to younger, technology-savvy consumers, said Paul Saffo, managing director at investment adviser Discern Analytics.

Under CEO Steve Jobs, Apple has gained share in the digital-music and mobile-phone industries with products that demonstrate his appreciation of customers’ preferences, says Saffo, whose firm is based in San Francisco.

Knowing Customers’ Needs

“There’s that notion that a younger perspective really matters,” he said. “It’s the difference between understanding new technologies intellectually versus intuitively. It’s not necessarily an age thing. Look at Steve Jobs -- he’s old enough to join AARP -- but he has an intuitive understanding.”

Cisco CEO John Chambers, who scrapped a longstanding target for annual sales increases of as much as 17 percent earlier this month after five straight quarters of disappointing earnings reports, “could be the next target,” Cusumano said.

Chambers is taking steps to revive growth by eliminating jobs, exiting lower-margin consumer businesses and dismantling a management structure that slowed decision making. Still, the shares have yet to reverse a slide that has left them 29 percent lower in the past 12 months, compared with a 24 percent gain in the Standard & Poor’s 500 Index.

“People worry Cisco has lost their edge and John Chambers isn’t what he used to be,” said Dan Morgan, a fund manager at Synovus Securities Inc., which oversees $7.5 billion and cut its Cisco holdings this year, according to Bloomberg data.

Karen Tillman, a spokeswoman for San Jose, California-based Cisco, declined to comment.

CEO ‘Term Limits’

Some CEOs have spent too long in the job to be able to undertake the continual reinvention needed to keep pace, said Ed Zander, who served as CEO at the company then known as Motorola Inc. and chief operating officer at Sun Microsystems.

“I’ve always thought there ought to be some term limits on CEOs,” said Zander, who stepped down in 2008 as Motorola’s CEO. “There’s more questions and more focus on the management ranks, and do they have the wherewithal to keep reinventing. Some CEOs have been at it a while and it’s hard.”

Analysts from at least eight securities firms have cut their ratings on RIM after the Waterloo, Ontario-based company reduced profit forecasts late last month, adding to evidence that the maker of the BlackBerry is struggling to compete against Apple and Google in the smartphone market.

Lazaridis’ ‘Technological Brains’

Sameet Kanade, an analyst at Northern Securities Inc. in Toronto, has suggested the company should scrap its dual-CEO structure, elevating co-CEO Mike Lazaridis over Jim Balsillie.

“When the momentum was in their favor, not a lot of attention was paid to the disconnect of a co-CEO structure, but with it, accountability is divided, or is not focused on one person,” Kanade said. “Right now, they’re facing technological challenges and Lazaridis, the technological brains, should be running the whole show.”

RIM’s share of global smartphone sales fell to 13 percent in the first quarter, from 20 percent a year earlier, Gartner Inc. said. Share for Google’s Android more than tripled to 36 percent from 9.6 percent and Apple’s iOS rose to 17 percent from 15 percent. RIM stock has plummeted 27 percent in the past year.

Marisa Conway and Tenille Kennedy, spokeswomen for RIM, didn’t respond to requests for comment.

“There’s market impatience with anyone who is not No. 1 in their area,” Saffo said. “With all the technology shifts, the degree of uncertainty has increased dramatically. Executives have never had more pressure on them.”

--with assistance from Joseph Galante in San Francisco and Hugo Miller in Toronto. Editors: Tom Giles, Jillian Ward.

To contact the reporters on this story: Dina Bass in Seattle at dbass2@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.

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