Some big Microsoft shareholders who are happy about CEO Steve Ballmer's imminent exit now want his mentor, company co-founder and chairman Bill Gates, to follow him out the door.

Reuters is reporting that three of Microsoft's top 20 shareholders, representing 5% of the outstanding shares, want Bill Gates to resign as chairman.

REPORT: MSFT investors want Gates out as chairman

"If both Gates and Ballmer are out, and better capital allocators are in, Microsoft's stock will hit $40 within the next several months," predicts Dan Ferris, investment analyst at Stansberry & Associates Investment Research. "If Gates announces his resignation, the stock will rally."

Dissatisfied shareholders could be upset that Gates would likely stay the course that he and Ballmer have established by pushing for a Ballmer clone to replace his college buddy.

"The bigger issue is, now that Ballmer is being replaced, who will lead?" says Jack Gold, analyst J. Gold Associates. "Gates and Ballmer have essentially veto power over the selection process that not much will change, and the replacement will be cut from the same cloth.

"If you eliminate the existing chair and limit the influence of Ballmer on the selection process, you're more likely to get someone that can take Microsoft in a needed new direction," Gold says. "That would be the best outcome, in my opinion."


Under the Gates-Ballmer regime, Microsoft continues to rake in high profit margins with its Windows and Office software businesses, which require very little capital investment. Selling software licenses doesn't burn through cash like, say, building cars or jetliners.

The company had record revenue topping $73 billion in its last fiscal year, and has stockpiled nearly $70 billion in foreign securities, on which it pays zero U.S. taxes, and can quickly turn into cash.

But its share price has been on a plateau for more than a decade, because for a giant corporation that generates a mountain of free cash flow, Microsoft is viewed by many on Wall Street as being too stingy in rewarding shareholders.

Free cash flow is the money from core operations that's left over after it's reinvested to maintain and grow the business.


Even with a recent boost in dividends, Microsoft will convert about 40% of free cash into dividends. Meanwhile, Microsoft continues to chase Google and Amazon in online services, and Apple and Google in the mobile devices business.

"Whether they'll be successful or not is uncertain — it's anything but easy to show the world's second-richest man the door," says Charles King, principal analyst at Pund-IT. "But even wildly successful founders can't remain immune to their companies' ills forever."

The shareholders who want Gates to follow Ballmer out could view poor capital allocation as one of Microsoft's primary problems. Ballmer spent $21.7 billion to acquire aQuantive, Skype and Nokia. AQuantive devolved into a $6.2 billion write-down. The jury is out as to whether Skype or Nokia will pan out.


But there is a risk in separating Gates from Microsoft. "The concern is that with both Gates and Ballmer leaving, this may introduce uncertainty beyond initial reaction by active investors," says Al Hilwa, software development analyst at IDC. "One view of Microsoft is that there is a lot that can go wrong that still hasn't."