Greenlight’s Einhorn Says Microsoft Should Replace Ballmer–Bloomberg Businessweek

Posted on May 26, 2011 by


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.”

Posted in: USA