One Microsoft On, Ballmer Out, ValueAct In — Get Ready for the Next Shoe to Drop at Microsoft

It would seem that all it takes to be in a position to make big changes at Microsoft is $2.2 billion.

That’s the value of the tiny 0.8 percent stake that ValueAct had compiled, which was enough to get the software giant to agree last week to give the activist shareholder the option to take a seat on its board.

Let’s be clear — although Microsoft tried a take-the-trash-out-on-Friday-before-Labor-Day move, which was also a deadline for ValueAct to notify Microsoft if it planned a proxy battle — the news was unprecedented in the history of the company.

As voiced to me by many longtime observers and also investors, the notion that shareholders had become so disgruntled that the once-powerful company determined that it would lose a proxy fight pretty much says it all.

Here’s how The Wall Street Journal’s Shira Ovide correctly put it: “Few companies of Microsoft’s size have welcomed activist investors on to their boards, for fear of disruption and conflict. And in recent decades it would be unheard of for an outside director, who simply agitated for change, to be placed on a board.”

In fact, ValueAct — which is considered a management-friendly activist investor — manages only $12 billion in its fund, and so had to have a lot of investor support to put the true pressure on Microsoft.

As it turned out, it did not have to, gaining the right to join the board and presumably more, with little fuss. The ValueAct news came soon after the announcement last week that longtime CEO Steve Ballmer would step down within 12 months.

And — while Microsoft tried its best to deny any link between the two major events — they were clearly coupled. And mostly ill-timed, coming only weeks after Ballmer had outlined a major new strategy and reorganization for the company, called “One Microsoft.”

Now, according to numerous sources close to the situation, brace yourself for the next of many shoes to drop, in what appears to be a sequencing of events related to new management and perhaps a new configuration for the company itself.

In fact, it’s that “what’s next?” that is the big question winging around Microsoft, as insiders await another move in what is adding up to be a massive change at the company, a change that will eventually drastically reshape it.

At least that’s the hope of many.

“The problems have gotten so deep and intractable that whatever happens has to be pretty significant,” said one high-ranking exec. “We have lost a lot of time in some critical areas, and it’s not clear if we can catch up.”

Said a major investor: “When you are on a path of change of this magnitude, you have to ride it to the end, and we’re not at the end by any means.”

So what could come next?

Top of mind is whether the new CEO announcement will come sooner than later, because it seems inevitable that the next leader of Microsoft will be named by the company well before the 12 months that Ballmer said he might remain in the top job.

“This job will be filled sooner than later,” said one person close to the situation. “It’s imperative to bring a sense of clarity as soon as possible.”

Indeed, it’s dead clear that Ballmer is going to be increasingly perceived as a lame duck, although he has insisted to the execs he has been meeting with over the last week that he is decidedly not.

Sorry to be the ant at a garden party, but he is. (Sorry, Frank!)

That means that the Microsoft board — whose main job is to hire and fire CEOs — has to move quickly. It has already hired Heidrick & Struggles to vet candidates, but it’s clear that much of the selection will fall on the board committee charged with the job of finding the new leader.

And much of the choice — no matter how many I’m-in-charge-here interviews that the committee’s leader, former Symantec CEO John Thompson, gives — is likely to be in the control of member-in-chief, company co-founder and former Microsoft CEO Bill Gates.

In fact, Gates — who has begun to spend more time at Microsoft’s Redmond, Wash., campus recently, after many years of focusing almost exclusively on his massive and laudable humanitarian efforts — will be the kingmaker here, according to just about anyone credible.

That does not mean, those sources cautioned, that Gates will step in in some interim CEO role — a move most definitely not supported by his wife, Melinda Gates, and others close to him. Still, others have urged him to do so, especially to bolster confidence externally, and to dramatically improve morale internally. A Gates-Is-Back meme would certainly be interesting.

Another name bandied about as a possible interim chief is Ford CEO Alan Mulally, who advised Ballmer on Microsoft’s recent restructuring of its strategy and management.

But, Mulally — who, thankfully, always answers questions I ask him directly — wrote me in an email when I asked if it was time for him to abandon his signature red vest with the company logo: “I continue to be focused on serving our Ford … and I have my red Ford vest on right now!!”

(I like a man who can wear a sweater of any kind in 79 percent humidity in summer and also use double exclamation points without irony.)

So, no one Mulally, but it would be something for Microsoft to announce a CEO sooner than a month, indicating a sense of urgency that the company should be exhibiting more.

That said, inside the process is an ongoing debate about the kind of CEO needed, sources said. Internal versus external? Product guru versus operator? Techie or someone outside the industry? And, as many, many people joke, 55-year-old white guy versus everyone else?

Obviously, this could take some time.

But what about rejiggering the board now?

That’s not as far-fetched an idea as it seems. Yahoo got a real charge when a bunch of directors left and others joined, a move that came right before it selected new CEO Marissa Mayer from Yahoo.

Fresh eyes means, well, fresh eyes, and Microsoft’s board could use more than ValueAct to get it to look at the situation in a new way.

Adding someone like Mulally to the board is certainly an option, but I would imagine getting some much younger and diverse directors — check out the current board here to get my drift — would be a godsend to the company.

That would have to include some members from Silicon Valley to tie Microsoft to the powerful tech community, which would seem to be a good idea for the continuing isolated mentality at the company. I nominate, in no particular order: Facebook’s Mark Zuckerberg, Workday’s Aneel Bhusri, Dropbox’s Drew Houston, LinkedIn’s Jeff Weiner, Yahoo’s Marissa Mayer, and perhaps even Seattle-based Amazon boss Jeff Bezos.

Also important might be to bring in a global voice or two.

Of course, before it picks a CEO, Microsoft might make some massive move to reconfigure the company via acquisition or spinoff.

Top of mind: Buying Nokia to solidify its phone efforts, as well as bringing back former Microsoft exec and current Nokia CEO Stephen Elop. This move would be a whoa-nelly one, but not completely out in left field, either.

Microsoft could also spin parts of the company off, most especially its entertainment and games products, which is something many investors have already called for. With the recent loss of its leader, Don Mattrick, and the continued outlying status of the efforts, it’s not that much of a stretch to see them move alone or join with another company.

Right now, the efforts here have been bifurcated, with Terry Myerson’s Operating Systems Engineering Group busy on OS work for console and core cloud services for the operating system, while Devices and Studios Engineering Group’s Julie Larson-Green runs all hardware development, and has responsibility for all studios experiences, including games, music, video and other entertainment.

(Confused? So am I!)

MSN could also be sold off, as could its online ad efforts, although continuing in core search remains of critical importance, as it needs to be integrated across a number of key areas, such as Windows and mobile.

But there’s no doubt that simplifying Microsoft would be welcomed, especially if it allows its powerful and lucrative enterprise efforts to prosper.

What else? There are a lot of options on the table, as Microsoft faces its most important renovation in its history.

The only one not tenable, of course, is to do nothing, and to take a long time doing it.

In that case, investors will only make it ever-cheaper to be able to influence a company that was once the most influential in the world.