Some analysts said the deal reflected the dissatisfaction of Microsoft investors who are unhappy that the company's stock price has fallen about 40 percent during Ballmer's 14 years as CEO. Ballmer said at the time his retirement had nothing to do with ValueAct and that the decision to step down was his own.
He reiterated that position in November, when Ballmer and members of Microsoft's board told The Wall Street Journal he had decided to retire after becoming convinced a new leader was needed to help Microsoft get where it needs to be more quickly.
Among the other rumored candidates were Ford's Mulally; Kevin Turner, the company's COO and former CIO of Walmart and Stephen Elop, former Nokia CEO and former division president at Microsoft, who is due to return to Redmond when Microsoft's acquisition of Nokia's smartphone business is completed.
The new CEO will have to lead Microsoft through its transformation into a company that can sell more cloud services and hardware devices alongside its packaged software. That applies to both its consumer and enterprise businesses, as software moves to the cloud and devices like tablets and smartphones take on more tasks handled by PCs.
Products central to the transformation include Microsoft Xbox gaming console and Surface tablets, its Office 365 online applications and its Azure cloud infrastructure platform.
Microsoft will be selling more devices when it closes the US$7.2 billion Nokia deal. Nokia and Microsoft have partnered for years to make smartphones that run the Windows Phone OS, like the Lumia line. The new CEO will also have to oversee the integration of Nokia's staff and business with Microsoft, avoiding the problems that can often eclipse the benefits of such big acquisitions.
A major challenge for Nadella will be to make sure Microsoft continues to improve on Windows 8 and its Windows 8.1 update. The radical redesign of the flagship OS for PCs and tablets has received mixed reviews from consumers and business customers.
It's essential for Windows 8.x to improve Microsoft's weak position in the tablet market, where Microsoft has taken a beating from Apple's iPad and from tablets running Google's Android. That's why Microsoft revamped the user interface, optimizing it for touch screens.
Likewise, Microsoft's bold venture to develop its own tablets remains a work in progress. The second wave of Surface devices recently came out after the first generation failed to impress, particularly the version that runs on ARM chips and the RT version of Windows 8.
Another high-stakes project that's in the works -- and many say overdue -- is the delivery of a native, full-featured version of Office for the iPad and for Android tablets. It's a move some say Microsoft has been reticent to make for fear of hurting its Windows business.
Perhaps as important, Nadella will need to recognize new market shifts and lead the company to pounce on those opportunities early. Ballmer was faulted for failing to grasp the revolution that has made tablets and smartphones must-have devices. Earlier, under his watch, Microsoft failed to see the opportunity in online search that made Google a global titan, and the social networking craze that Facebook and Twitter seized upon.
Ballmer was also criticized for what some see as his slow reaction to enterprise cloud computing, although Microsoft has now recovered lost ground with products like Azure and Office 365.