About a year ago, Apple (Nasdaq:AAPL) surpassed Microsoft (Nasdaq:MSFT) as the world’s largest tech company by market cap. It’s hard to believe that back in 1997, when Steve Jobs returned to Apple, bankruptcy was a possibility. In fact, he had to get an investment from Microsoft to stay afloat.
Things can certainly change quickly. For example, Microsoft may fall further behind the tech pecking order as IBM (NYSE:IBM
) is poised to take the No.2 spot (it had held that spot about 15 years ago). IBM’s market cap of $302 billion is about $3 billion behind Microsoft.
Granted, the market-cap game is somewhat trivial. But it does highlight some important lessons for investors.
First of all, a fallen tech company can return to greatness. Keep in mind that — besides Apple — IBM was also a basket case during the early 1990s. Both companies had little strategic direction and were living off their old technologies.
What made the difference? Of course, it was leadership. In the case of IBM, it hired Lou Gerstner. A former top McKinsey & Co. consultant and savvy corporate executive, he knew how to streamline an organization and make the right strategic bets. To this end, he bolstered the global services business and acquired so-called middle-ware software companies.
This focus continues today. Interestingly enough, IBM’s massive scale and back-end technologies are likely to make it a huge beneficiary of cloud computing, which is a massive growth opportunity.
As for Jobs? We all know the story. He leveraged his consumer expertise to rethink products like the MP3 player, cell phone and tablet. But he was also fanatical in instilling discipline in the organization, which was badly needed.
Then there is Microsoft. Where is the strategic focus? It’s vague, because the company wants to dominate all tech industries. And while it has franchise businesses — such as in server tools, productivity products and operating systems — it has other efforts that look like distractions. A prime example is its search engine. Do you really think it can make a real dent in Google’s (Nasdaq:GOOG) market share?
In other words, Microsoft needs new leadership, someone who is not afraid to spin off businesses, cut costs and bring back some focus. The problem is that there is no urgency to do these things, as the company continues to generate huge amounts of cash flows. If anything, Microsoft is doubling down on its failed consumer Internet strategy with its recent $8.5 billion deal for Skype.
Basically, as with Apple and IBM, Microsoft will not truly make serious changes until it faces a real crisis. And that can be a long wait for investors.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
