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TheStreet Open House

A Microsoft Acquisition Could Solve Ballmer's Innovation Stall

Stocks in this article: MSFTCRMADBEAAPLAOL

NEW YORK ( TheStreet) -- Microsoft (MSFT) shouldn't just look for a new CEO after its longtime head Steve Ballmer said he would retire in 2014 amid a string of consumer product flops and disappointing upgrades to its Windows operating system.

Microsoft also needs to look for acquisitions that can help the company transition into new businesses that are beyond its PC-industry dominance.

Sales at Microsoft remain impressive and the company's bottom-line has consistently grown under Ballmer's tenure. However, a weak rollout of the Windows 8 operating system leaves the company's future in an uncertain position. What happens if consumers and businesses continue to move away from PC-based software and into the mobile and cloud-based computing offered by competitors such as Apple (AAPL) and Google (GOOG)?

Microsoft's next CEO will likely try to replicate Ballmer's efforts to forge into new markets and businesses, albeit with more success.

Given the under-performance of Windows 8 and the mobile devices that use the operating system, it is unclear whether the company currently has the assets it needs to take on the likes of Apple, Google or even Samsung in consumer markets. The next Microsoft CEO could also decide that after more than a decade of chasing consumer markets, the company's success lies with enterprise-based businesses.

Either way, the right acquisition could solve two crucial problems for Microsoft in one move. The company could use an acquisition to hasten much-needed strategic change, while also bringing in a replacement for Ballmer. It is also unclear whether investors would want a company insider to replace Ballmer, given Microsoft's stagnant performance.

Microsoft has many options.

The company holds minimal debt relative to its earnings and it has a growing cash stockpile that could top $80 billion by the end of this quarter. Simply put, there are few companies in the tech, media or entertainment industries that are beyond Microsoft's reach. Given the company's current valuation and its base of assets, there are also likely many industry visionaries who would jump at the chance of to turn around a tech sector bellwether.

Simply put, now may be the perfect time for Microsoft to make a bold move. So where should the company look?

Adobe (ADBE) stands out as a large-sized tech firm with a management team and suite of products that could perfectly complement Microsoft's existing businesses. Current CEO Shantanu Narayen has successfully navigated the Acrobat and Flash pioneer through a once life-threatening battle with Apple's Steve Jobs and re-positioned the company at a smart confluence of mobile, software and web publishing markets.

Narayen proved in a battle with Jobs over Flash's inclusion in the iPhone ecosystem that he can win public relations battles with some of the technology industry's strongest personalities. While Adobe didn't get Flash on the iPhone, it did come out of the dispute with a cleaner shirt.

As TheStreet noted in December, the company was also able to use its iPhone failure as a means to move into a more sustainable market position. Instead of becoming an iPhone supplier, Adobe began building cloud businesses that leveraged its strongest software assets such as Photoshop and Acrobat. The company also used acquisitions of Macromedia and Omniture to help it shift into publishing and mobile media markets.

As it turns out, Adobe is back on the iPhone, this time with a well-received mobile application for its best software. Adobe's applications, its cloud offerings for creative software users and its online publishing assets all could fill areas of weakness in Microsoft's mobile device and software offerings.

The company's shares are up over 35% in the past 12 months. The stock recently breached a record high above $48 a share that was considered unthinkable by many after the firm lost its Flash war with Jobs in 2007.

ValueAct, a methodical activist hedge fund that many see as operating behind the scenes of change at Microsoft, is one of Adobe's largest investors. In a 2012 interview with TheStreet, the firm's media shy head Jeff Ubben praised Adobe's turnaround under Narayen. Ubben also made a full-throated pitch for more merger and acquisition activity in Corporate America, a rare stance for an investor that many see as an activist.

Microsoft shares have been on the rise since Ubben revealed the firm as his newest multi-billion dollar investment. Some are expecting dramatic change.

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