The surprise move sent the company's share price up 7 percent, reflecting a widespread view that Ballmer is not the man to reverse the fortunes of a company that remains highly profitable but has failed to navigate the transition to the mobile computing era.
Ballmer's planned exit comes just weeks after the company announced a major reorganization and delivered an earnings report that showed across-the-board weakness in the business, including dismal sales of the company's new Surface tablet and a lukewarm reaction to the crucial Windows 8 operating system, reuters reports.
Microsoft said it had engaged the executive search firm Heidrick & Struggles and would consider both internal and external candidates to succeed Ballmer - underscoring the lack of a succession plan at a company where many talented executives have been squeezed out over the years. Ballmer will stay on for up to a year until a new CEO is found.
A close friend and confidant of co-founder Bill Gates since the company's earliest days, the 57-year-old Ballmer formally notified the company two days ago of his intention to retire, according to a regulatory filing. In an interview with the trade publication ZD Net, director John Thompson said the search for a successor had in fact been underway for some time.
"We are well down the path in the search," said Thomson, who is leading a search committee that also includes Gates.
Still, the timing of the announcement and the lack of a succession plan suggest the recent setbacks may have spurred the company's board to act. Gates remains chairman of the board, which has historically followed his lead.
Ballmer himself acknowledged his decision was abrupt.
"There is never a perfect time for this type of transition, but now is the right time," he wrote in a memo to employees. "This is an emotional and difficult thing for me to do. I take this step in the best interests of the company I love."
Ballmer has faced criticism from investors for years as rivals led by Apple Inc and Google Inc came to dominate huge new markets in smartphones, tablets, Internet search and cloud computing even as Microsoft remained reliant on the traditional personal computer.
Activist investing fund ValueAct Capital Management LP said in April that it had taken a stake in the company and shortly after began agitating for a change in strategy and a clear CEO succession plan.
Microsoft, like Apple, has been under pressure from shareholders to hand back more of its cash hoard, which now totals $77 billion.
"This might accelerate more shareholder-friendly capital returns of that cash treasure trove, which would help in the revaluation of the stock to more appropriate levels," said Todd Lowenstein at fund firm HighMark Capital Management, which holds Microsoft shares.
There are no obvious candidates to succeed Ballmer at a company that has only had two CEOs in its 38-year history. Ballmer had once indicated that he intended to stay at least until 2017.
Ballmer can claim some important successes: revenue tripled during his tenure, profits doubled, and the company scored a big success with the Xbox videogame business. The Windows and Office franchises remain highly profitable, and Microsoft is well-entrenched as a vendor of corporate computing products and services.
Microsoft shares closed up 7.3 percent at $34.75 on Nasdaq on Friday.
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