A mid-life crisis can go very badly, even for the largest corporation. It doesn’t just happen when a CEO dies, as with Steve Jobs at Apple (NASDAQ:AAPL), or simply ages out, as with Sumner Redstone and Viacom (NASDAQ:VIAB). A succession crisis can happen at any time, even to the largest company. This week, Kevin Systrom and Mike Krieger, who co-founded Instagram in 2012, are leaving the company amid strife with Facebook (NASDAQ:FB) CEO Mark Zuckerberg.
If such crises are handled well, investors may not notice it. If they’re not, investors can be badly hurt. Even if the company appears successful, it may be missing opportunities that should tell investors to bail out. For those who don’t follow their holdings closely, any succession is a fraught time. Will the company’s direction hold, and will that prove to be the right direction?
As technology companies have grown ever-more powerful in this century, these questions have been asked, and answered, in different ways, and they are still being asked.
Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) faced its succession crisis a decade ago, when CEO Bill Gates retired to devote more time to his Gates Foundation. He is handing the CEO chair to his long-time number two, Steve Ballmer.
Ballmer continued along the path Gates had set, of bundling Microsoft products, expanding when others created valuable new niches, and emphasizing the proprietary nature of its ecosystem. It didn’t go well. Over the next nine years, Microsoft shares did rise 58%, but this was half the gain generated by the Nasdaq.
By the time Ballmer himself retired, eventually buying the Los Angeles Clippers basketball team, it was clear that Microsoft’s strategic direction had to change. Microsoft had failed to compete with Apple in devices and was rapidly falling behind in the cloud. Gates himself even had to step in, to a more “product” central role, to smooth Ballmer’s way out.
After a long search, Microsoft did get it right. It even found the solution within its own ranks, in Satya Nadella, then-president of the company’s server and tools division. Nadella had moved the company’s database, Windows server and developer tools to its Azure cloud.
Upon taking over in 2014, Nadella moved the whole company to the cloud. He invested in new data centers, made its products subscription services rather than discrete products and made peace with the open source movement. The company’s market cap has nearly tripled, and it is now known as one of the five “Cloud Czars” dominating the world economy.
Alibaba Group Holding (BABA)
In taking Alibaba (NYSE:BABA) public in 2014, CEO Jack Ma charmed the New York business world. He was less the dour Chinese business executive than the quintessential American, with his love of the movie Forrest Gump and ambition to become a philanthropist like Andrew Carnegie.
But Ma was dead serious about his ultimate ambition, and he immediately began looking for a successor who would take him out of the company and let him get on with good works in his native country. His first choice as successor, Jonathan Lu, was dubbed “the corporate alter ego” of Ma because of his low-key style. Even as the company went public, cracks in the relationship were appearing. Lu was quietly promoted to the status of “honorary partner” in 2015, and now has a net worth of $1.1 billion.
The second successor is Daniel Zhang, born Zhang Yong in Shanghai in 1972. Zhang joined Alibaba in 2007, leading its consumer-oriented TMall. He is given credit with creating “Singles Day,” now the world’s largest online shopping event. This succession looks like it will hold. It was announced recently that Zhang will replace Ma as executive chairman of the company next September.
Zhang has made Alibaba more of a brick-and-mortar retailer, investing in shopping centers and entertainment. This has hurt profit margins, with net income down by more than half in the June quarter from the previous September.
This year, Zhang bought Ele.me, a food delivery business, and is investing heavily in it. He is also investing heavily in physical logistics, as opposed to just the cloud, and bought a furniture retailer, Easyhome. All this will depress margins further, and Alibaba shares are heavily shorted, but Citron Research, which normally advises shorts, is bullish on the stock.
Alphabet (GOOGL)
Alphabet (NASDAQ:GOOGL) CEO Larry Page has disappeared. The CEO and co-founder of Google’s parent company have reportedly spent time on his private Caribbean Island, thinking about things like a “Hyperloop” powered by bicycles. Page is 45. It’s a good time for a mid-life re-think. The important point for investors is that he has left his company Alphabet in good hands.
Under Chief Financial Officer Ruth Porat, recruited in 2015, Google has become more disciplined, and more profitable. Revenue will blow past $120 billion this year, up over 10%, and operating income for the first two quarters came to nearly $15 billion. Sundar Pichai, reportedly considered for the CEO job Nadella got at Microsoft, has also done a good job since taking over at Google in August 2015. Pichai has moved Google more into products, like Google Home and the Chromebook line, and the Chrome browser whose creation he directed now has more than half the market.
Not all is well, of course. Washington wasn’t happy about Google missing its tech inquisition, Europe is demanding it police copyright and fined it $5 billion over Chrome being bundled with Android. There are persistent reports Google is about to enter the China market with a censored search engine.
But every country wants a censored search engine. That train left the station with Europe’s “right to be forgotten” law, which Europe wants to make global. Google is an essential utility. Without it, search doesn’t become find. Pichai’s low profile may be just what the company needs. The stock is up 12% on the year, despite September’s general attack on tech stocks. If Porat can find even a tiny dividend, it might go up like a rocket.
Page can rest easy as he considers his own next act, and so can his investors.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and MSFT.
