The High Cost of Stephen Elop as Microsoft’s Next CEO

Over this labor day weekend I was working on an editorial analyzing some of the implications of getting Stephen Elop onboard as Microsoft’s next CEO.  Spending time with family kept me quite busy and I never quite finished it as early as I had intended.  And then this morning I get to work, I see a message from Pradeep, BOOM, Microsoft has acquired Nokia.  Well I hate for my editorial to go to complete waste, so I’m going to share what my thoughts were before the announcement and publish part of it anyways.  I made some incorrect assumptions in the editorial I was writing, but I got some things correct too.  Here it is for those interested in its rough, unfinished form:

Stephen Elop.  Stephen Elop.  Stephen Elop.  Now say it with me, Stephen Elop.  I have not gone a two seconds, since Microsoft CEO Steven Ballmer’s retirement announcement, without hearing the Nokia CEO’s name uttered as a possible replacement. 

And I certainly agree Elop would be a great asset for Microsoft.  He has spent the last three years focused solely on mobile and the challenges that come with the territory.  He has also spent time at a cash strapped company that is struggling to survive and forced to innovate.  Elop has probably gained rare and priceless experience that few other people would have.

A question I see seldom asked is does Elop even want to be CEO of Microsoft?  We know Elop is very ambitious: having previously served (briefly) as CEO of Macromedia, moving on to serve in senior executive positions after the acquisition by Adobe, then jumping ship to Microsoft after being personally recruited by Ballmer to replace Jeffrey Raikes, and then finally to serve as President & CEO of Nokia.  Even if we assume Elop wants the job, does he have a vision for the company, can he fix the marketing problem, and he successfully change and re-charge the culture at Microsoft?  What would Elop’s “burning platform” memo say at Microsoft? 

Lets ignore the above questions and assume that Bill Gates, Steve Ballmer & the board have decided they want Stephen Elop as CEO.  They only realistic way Elop would come on board is through an ‘acqui-hire.’  That is to say, Microsoft will need to buy Nokia to gain Stephen Elop as CEO.  Large companies often do this by buying start-ups to continually gain good talent.  However, this is rarely done on a larger scale.  Just as a side note I totally disagree with Kara Swisher that Ballmer is a “lame-duck” CEO, he’ll make any deal happen that he really wants to. I’ll have more on this with an upcoming Ballmer story.

So how much would it cost to acquire Nokia?  Let’s do some quick math here.  There are currently ~3.75 billion shares of outstanding Nokia stock (total amount of common stock owned by investors).  Current share price is around ~$4.00 a share.  This puts the total market cap (or worth) of the company around $15 billion (3.75 billion x $4 per share).  Therefore, at a minimum it would cost Microsoft $15 billion to purchase the entire company.  I assuming, Microsoft will not have to pay a premium on the share price since the company is struggling and continues to burn through cash.  In addition, Microsoft has paid Nokia nearly a billion dollars a year since they signed their agreement in 2011; that goodwill may be taken into account.

Now Nokia has nearly ~100,000 employees and some of that is related to Nokia-Siemens, manufacturing employees (not as much outsourcing), and Navteq (mapping services).  I doubt Microsoft really wants to acquire the whole company and near double the size of Microsoft, but they may not really have a choice.  They may have to acquire the whole company and then sell off the parts they do not want later, as with other acquisitions.

Another big problem will be EU regulations and taxes.  There were rumors that Microsoft was going to acquire Nokia earlier this year but it fell through due to tax concerns.  I think this is quite plausible, as Microsoft has always done all it can do to pay the least amount of taxes possible.  Right now Microsoft has over $60 Billion sitting offshore.  They could probably use some of that money for an acquisition without too many tax problems.  Nevertheless, it cannot avoid added regulations from the EU, which have always been a massive headache for Microsoft.

Wall Street is another problem.  They are not going to be happy about a major acquisition from Microsoft.  A couple billion dollars spent in an acquisition is a couple billion that could have gone to a stock buy-back program or special dividend.  Adding nearly a ~100k employees is not going to go over well at all.  There is also a difference of when Wall Street realizes trends and when enthusiasts see trends.  I think we all saw the dominance of Android coming from a mile away about two years ago.  But this did not affect Apple’s share price until a few months ago.  Similarly acquiring Nokia signals to Wall Street how important mobile is for Microsoft.  At the same time, it also highlights how badly Microsoft is doing in the mobile space.  Ballmer’s retirement announcement bumped up the stock 7%, I would predict that a Nokia acquisition announcement bumps down the stock 7%.

I not entirely convinced that Stephen Elop is the best person for CEO of Microsoft.  At the same time, I honestly do not know if I could name anyone better.  In many ways, it is similar to the position that Ballmer has been in.  For as long as I have been covering Microsoft people have been clamoring for Ballmer to step down, but without a realistic replacement that would have done significantly better than Ballmer has.

When did you think Microsoft was going to acquire Nokia? Earlier, later, never? Share your thoughts in the comments below.

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