Microsoft CEO Ballmer's Surprise Retirement

10 Hidden Benefits of Windows 8.1

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Microsoft announced Friday that CEO Steve Ballmer will step down within the next 12 months. The company's board of directors has appointed a special committee to select Ballmer's replacement, a committee that includes Microsoft chairman and co-founder Bill Gates.

The announcement was unexpected for a number of reasons, not the least of which is Ballmer's previous indication that he'd remain as CEO until his youngest child is in college, which won't happen until 2017 or 2018. It also comes during a period in which Ballmer seemed to be working on his legacy. Last fall, he announced that Microsoft would transition into a "devices and services" company. In July, he unveiled his "one Microsoft" reorganization plan, which is reshuffling the company to make it more collaborative, and to help its products connect with and enhance one another.

"There is never a perfect time for this type of transition, but now is the right time," Ballmer said in a statement. He said he had previously intended to retire "in the middle" of Microsoft's transformation but determined the company needs a leader "who will be here for the longer term."

The announcement also follows one of Microsoft's worst financial quarters in recent history, which included a nearly $1 billion write-down related to poor sales of Microsoft's Surface tablets. Coupled with the ongoing struggles of Windows 8, the tablets' failure has left many investors skeptical of Ballmer's strategy.

Indeed, earlier this week, Nomura analyst Rick Sherlund wrote in a research note that ValueAct, a hedge fund that holds almost a 1% stake in Microsoft, could be planning to gain a seat on the company's board via a proxy battle. Calling Microsoft's recent downturn "everything an activist shareholder could ask for," Sherlund suggested ValueAct could influence the company's strategy, with potential agenda items including the release of Office for the iPad, a rededication to enterprise products and perhaps even the sale of its Xbox business.

Such commentary isn't surprising from Sherlund, who advocated many of the same moves earlier this year. But in July, Reuters, citing inside sources, also reported that ValueAct was maneuvering for a board seat. The article said ValueAct is thought to disapprove of Microsoft's move into making its own devices, and that several of Microsoft's top institutional investors had contacted ValueAct to express concern over Microsoft's tactics and execution. It remains to be seen if ValueAct makes a move, but it's clear investor concern has mounted.

That said, Ballmer has successfully developed several new business streams for Microsoft. Most recently, the company has made aggressive moves into the cloud with Windows Azure, Windows Server 2012 R2 and Office 365. Even those relatively critical of Ballmer recognize the potential in these businesses; Sherlund, for example, noted the long-term benefits of Office 365's subscription model, as well as the potential for Microsoft products to tie together more closely via the cloud.

Until he officially steps down, Ballmer will have plenty to keep him busy. Windows 8.1 launches in less than two months, and how well it sells during the holidays could determine the extent to which Ballmer's successor hews to the current CEO's "devices and services" vision. Shortly thereafter, the longevity of the Modern UI will face a test from the enterprise; by 2014, many companies will be scrambling to retire Windows XP, and, in many cases, moving to refresh hardware. The company is also expected to unveil new Surface tablets as well as a Surface-branded smart watch. Unconfirmed projects, such Modern UI versions of Microsoft Office, are also likely to be in the cards.