Pop quiz: Who is the most successful CEO in the history of Microsoft?
A lot of people might guess Bill Gates, after all he has spent most of the last 25 years as one of 2-3 richest people in the world. Bill Gates co-founded the company then served as CEO from 1975 to 2000.
Or maybe you would guess Steve Ballmer who led Microsoft from 2000 to 2014, as it recovered from the depths of the dotcom bubble crash and grew back up into a modern tech conglomerate, as opposed to a one-trick-pony software monopoly.
Gates and Ballmer are incorrect guesses.
The correct answer? Current CEO Satya Nadella.
Don't believe me? Consider the following:
During Bill Gates' reign, Microsoft's peak market cap was $614 billion. That market cap was achieved on December 27, 1999 at the absolute peak of the dotcom bubble. One year later, after the bubble burst, Microsoft's market cap had crashed all the way down to $250 billion. The company's market cap wouldn't break $500 billion again until 2017, under Nadella.
When Steve Ballmer took over, the company's market cap was around $260 billion. During Ballmer's reign, Microsoft dropped as low as $160 billion in the washout from the 2008 great recession then peaked at $315 billion right before he handed over to Satya Nadella.
Satya Nadella became CEO on February 4, 2014. As of today's market close, Microsoft's market cap is…
Anecdotally, the same thing happened at Apple.
Everyone thinks of Steve Jobs as Apple's ultimate all-time super genius business leader. And ya maybe he was a genius, but Tim Cook has absolutely destroyed Jobs' track record as a business operator.
Apple's peak market cap under Steve Jobs was $350 billion. Tim Cook took over in 2011. Today, Apple is the most valuable company in the world with a market cap of $2.63 trillion.
But back to Satya Nadella.
When he was named CEO of Microsoft back in 2014, Satya was awarded with a generous package of stock options that vested within 3-5 years depending on various milestones. According to a recent SEO filing, prior to last week Satya owned 1.7 million vested shares. A vested share is a share he can actually sell. When his shares were granted back in 2014, they would have been worth roughly $70 million using Microsoft's share price at the time.
Microsoft's share price increased roughly 10-fold in the ensuing years. And now Satya is cashing-in on his success.
That same recent SEO filing showed that Satya Nadella sold 838,584 shares of Microsoft over a two day period last week. Those sales yielded a pre-tax gain of $285 million. Those 838,584 shares represented almost exactly 50% of his total Microsoft holdings.
A Microsoft spokesperson gave the following explanation for the share sales to the Wall Street Journal:
"Satya sold approximately 840,000 shares of his holdings of Microsoft stock for personal financial planning and diversification reasons. He is committed to the continued success of the company and his holdings significantly exceed the holding requirements set by the Microsoft Board of Directors."
Another reason for the sales, as theorized by the Wall Street Journal, concerns an upcoming change to Washington's state tax code. Washington does not have a state income tax, but starting in 2022 the state will impose a 7% tax on long-term capital gains when the gain is greater than $250,000. In other words, by selling in 2021 Satya's $285 million gain will only be subject to the IRS' 20% long-term capital gains tax rate. The same sale in 2022 would be subject to 27% in combined state and federal taxes. So, one could say that Satya is trying to save around $20 million (7% of $285 million) by selling shares now.
I sort of doubt that saving $20 million on taxes was a major factor, though. Sure, $20 million will buy an extremely nice vacation home in the Bahamas, but judging by Satya's performance over the last seven years, he could make far more than $20 million by simply holding all of his shares and selling them all at a much higher price per share in the future… even after factoring in the 7% Washington special tax.
For example –
Microsoft closed today at $336 per share. Let's pretend Satya continued to hold his 1.7 million shares and at some point the share price goes to $400. If that happened his 1.7 million shares would be worth $680 million pre-tax. If he sold half his stake at that point, 840,000 shares would result in a gain of $336 million. Satya would then pay 27% in state and federal taxes, leaving him with $245 million in profits.
After paying 20% to the IRS alone on his $285 million sales from last week, Satya will net $228 million. So in this very hypothetical made-up example, Satya would make $17 million more by holding onto the shares and sucking up Washington's 7% tax. But who knows what the stock will do. It might drop in half.
Personally, I think these sales were simply a way for Satya to reward himself with a huge chunk of liquid cash.