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Originally published March 8, 2014 at 8:01 PM | Page modified March 9, 2014 at 10:05 AM

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Microsoft CEO Nadella inherited legacy of Ballmer board division

A behind-the-scenes recounting tells of loud arguments, divisions and a good deal of maneuvering in the Microsoft boardroom as it considered the acquisition of Nokia’s handset business, the future of CEO Steve Ballmer and the selection of Satya Nadella as Ballmer’s replacement.


Bloomberg News

Microsoft’s board of directors

John Thompson

Chairman; CEO of Virtual Instruments

Steve Ballmer

Former CEO, Microsoft

Dina Dublon

Former chief financial officer, JP Morgan Chase

Bill Gates

Co-founder, technology adviser

Maria Klawe

President, Harvey Mudd College

Stephen Luczo

Chairman, CEO, Seagate Technology

David Marquardt

General partner, August Capital

Satya Nadella

Chief executive officer

Charles Noski

Former vice chairman, Bank of America

Dr. Helmut Panke

Former chairman of board, BMW AG

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As Satya Nadella puts his stamp on Microsoft, he’s coming to grips with the tug of war over strategy and the clash of personalities that marked Steve Ballmer’s final years at the helm.

Nadella, who succeeded Ballmer one month ago, took a step last week by unraveling part of a restructuring his predecessor put in place in one of his last acts as chief executive officer. Nadella appointed onetime Democratic political operative Mark Penn to the just-invented post of chief strategy officer and shuffled other executives to resolve an unwieldy setup Ballmer had established in the marketing department.

The new CEO is seeking to reshape a company whose main businesses are losing steam as efforts to expand on the Web and in mobile devices have been thwarted, mostly by Apple and Google. Nadella will also exert his influence on the push into hardware, a strategy shift that fueled some of Ballmer’s fiercest arguments with the board.

Before the announcement in August that he would be retiring, some directors were so exasperated they talked about how they might ease him out, including by hiring someone he admired, Ford Motor CEO Alan Mulally, to succeed him, according to sources.

Mulally later fell out of favor when members viewed him as behaving as though the job should be handed to him without so much as a formal interview, according to sources. A spokeswoman for Mulally declined to comment.

Ballmer’s relations with the board hit a low when he shouted at a June meeting that if he didn’t get his way he couldn’t be CEO, people briefed on the meeting said. The flare-up was over his proposed purchase of most of Nokia, and part of an ongoing debate: Should Microsoft be a software company or a hardware company, too?

Several directors and co-founder and then-Chairman Bill Gates — Ballmer’s longtime friend and advocate — initially balked at the move into making smartphones, according to sources. So, at first, did Nadella, signaling his position in a straw poll to gauge executives’ reaction to the deal. Nadella later changed his mind.

“Nokia brings mobile-first depth across hardware, software, design, global-supply chain expertise and deep understanding and connections across the mobile market,” Nadella said Tuesday in an emailed statement. “This is the right move for Microsoft.”

In his shake-up, he reassigned Penn, who spearheaded the “Don’t Get Scroogled” campaign that dissed Google, and replaced Tony Bates, an opponent of the Nokia purchase who was passed over for CEO and left the company last week.

Ballmer declined to comment. He remains on the board, along with Gates, who stepped down as chairman to be Nadella’s technology adviser. John Thompson replaced Gates as chairman. Thompson, Gates and Nadella also declined to be interviewed.

Loud argument

Ballmer was so loud that day in June his shouts could be heard outside the conference room, sources said. He had been told the board didn’t back his plan to acquire two Nokia units. He later got most of what he wanted, with the board signing off on a $7.2 billion purchase of Nokia’s mobile-phone business.

Concerns over Microsoft’s direction had been mounting for months. For some directors, the question was whether Ballmer should still lead, according to people close to the board.

They were frustrated by his tendency to talk more than listen, the people said, and his reaction to the pushback on Nokia was for some the last straw. The board rejected the first deal as too expensive and complex.

Two outsiders who joined the board in the first half of 2012 — Thompson, a former Symantec CEO, and Steve Luczo, CEO of Seagate Technology — teamed with others to challenge him. They pressured him to move faster to compete with Apple, Google and others dominating mobile technology.

As Microsoft continued to lag behind rivals, some directors grew more unhappy. Ballmer had introduced Mulally as part of the company’s succession planning, and those on the board looking for ways to move Ballmer out talked in July about hiring the Ford CEO as a way to persuade the CEO to step down. In August, Ballmer, 57, announced he would retire, earlier than planned.

He wouldn’t have done that unless he’d lost Gates’ backing, said Yale University business professor Jeffrey Sonnenfeld. Gates had persuaded Ballmer to drop out of business school to join Microsoft in 1980.

They remained close, through some rough patches, after Gates handed over the CEO reins in 2000 and became chief software architect, a post he held until 2008.

Differences emerged over the move into hardware, according to sources. Gates didn’t agree that the world’s largest software-maker should produce its own mobile devices, and Ballmer was hurt that Gates didn’t back him, the people said. At November’s shareholder meeting, General Counsel Brad Smith had to persuade them to take the stage together.

The seeds of Ballmer’s hastened departure were sewn with the October 2012 unveiling of a new edition of the Windows operating system that he championed, a revamp of Microsoft’s mobile-phone software and the introduction of its very first tablet computer. Meant to address the company’s shortcomings, the products exposed them instead when they flopped.

There were success stories under Ballmer. Net income almost tripled, Microsoft become a video-game leader with the Xbox and online versions of its Office suite of software proved popular.

He promoted Nadella to head the server unit with instructions to move aggressively into Web-based services, and Nadella re-engineered the business into a No. 2 behind Amazon.com.

What Ballmer failed to figure out was how to respond effectively to PCs’ becoming passé. Consumers had fallen in love with smartphones and tablets from Apple and Samsung Electronics and other devices that didn’t operate on Microsoft software.

The tablet Microsoft finally came out with in October 2012, the Surface, was a dud. Windows 8, with a touch-based design, was released to mixed reviews. The smartphone-operating system, Windows Phone, wasn’t a hit either — but Ballmer remained committed to it. A deadline was looming that would result in one of his last rolls of the dice.

Nokia made about 80 percent of handsets using Windows Phone, and the arrangement was set to expire in February 2014. Nokia had been dropping hints it might start making devices to run on Google’s Android platform. Ballmer needed a way to keep Nokia in Microsoft’s world.

In February 2013, on the eve of the Mobile World Congress show in Barcelona, Spain, he reached out to Nokia Chairman Risto Siilasmaa and started the talks that resulted in the agreement the board kicked back. Then the handset-only deal was hammered out; it included bringing Nokia CEO Stephen Elop, a former Ballmer lieutenant, back as head of a new devices unit.

Even on Ballmer’s senior team, the acquisition wasn’t universally popular. In the straw poll, several executives initially voted against it, including Nadella and Bates, according to sources. Nadella later sided with Ballmer, while Bates remained staunchly opposed.

In July, Microsoft reported the biggest earnings miss in at least a decade. Owing to poor sales of Surface, it took an unexpected $900 million charge to write down the value of inventory. That reinforced the view of some on the board that Microsoft would have a tough time expanding into hardware.

One of Ballmer’s last endeavors was a controversial restructuring that changed how the company is managed. While not a reversal, Nadella’s personnel moves last week were designed to establish a more cohesive, contented team.

The former CEO had put Penn and Tami Reller jointly in charge of aspects of marketing, an arrangement they were unhappy with, said a person familiar with the matter.

Reller went so far as to tell Ballmer he had to choose between them, said the person. She’s leaving the company and will be replaced by Chris Capossela, who had been pushed aside by Ballmer’s reorganization.

It was late on Aug. 22 that Ballmer shocked his leadership team with the news he’d be announcing his departure the next morning. Two outsiders who got a heads-up were Siilasmaa and Elop, of Nokia, said sources. Ballmer called each of them about 15 minutes before the announcement to reassure them Microsoft remained committed to the deal.

Moving up Ballmer’s retirement date raised hurdles. Nadella and other internal candidates hadn’t been groomed and weren’t as well known by investors, partners and the public as the company might have liked, said sources.

The board hired the executive-search firm Heidrick & Struggles and named a committee: Gates, Thompson, Luczo and former Bank of America Chief Financial Officer Charles Noski. Thompson said they generated an initial list of more than 100 names.

Ballmer asked Elop if he was interested. Worried the CEO wouldn’t have enough flexibility, Elop said he needed to hear from Gates and Thompson that they were serious about making changes, the person said, and agreed to interview after receiving assurances. Others, Mulally included, expressed concerns about the freedom they’d have with both Ballmer and Gates, the first two CEOs, on the board, people familiar with the process said.

Initially, directors were of the view the company should prioritize management skills over a technology pedigree, said people familiar with the discussions. The Ford CEO fit that profile and was acclaimed for saving the automaker without resorting to bankruptcies or bailouts, and for cultivating a more collaborative culture at the company.

Over time, Gates and other directors decided Microsoft needed someone from the industry. And Mulally’s ego got in the way, according to sources. By early December, his chances faded.

A person close to Mulally said he bowed out because he was worried about how much leeway he’d have to make decisions and was dismayed about how public the search had become. Ford spokeswoman Susan Krusel said Mulally declined to comment.

Some outsiders the board hoped would participate said no, including John Donahoe, CEO of eBay, and Paul Maritz, CEO of cloud-venture Pivotal, and a former Microsoft executive, sources said.

In December, Nadella was the leading internal candidate. Steve Mollenkopf, chief operating office at Qualcomm, was the top external choice and a serious competitor to Nadella, according to sources.

Unbeknown to Microsoft directors, Qualcomm’s board, fearful of losing Mollenkopf, was accelerating its own succession process. Less than 24 hours after Bloomberg News reported Mollenkopf was a major candidate, Qualcomm pulled the trigger.

Directors chose Nadella, 46, in a meeting in New York in January. Then the board began working out the details of Nadella’s deal and Gates’ future: He stepped down as chairman after 33 years to become technology adviser, spending one-third of his time at Microsoft. Nadella asked Gates, 58, to take on the role, according to a source.



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