Nadella, 46, emerged as one of the stronger candidates to replace departing CEO Steve Ballmer, 57, weeks ago, people familiar with the search have said. The plans aren't final, said the people.
The leadership changes would take place at a crucial point as Microsoft moves away from its roots as a software maker to focus on hardware and Internet-based services. Rivals such as Apple Inc. have shifted the technology landscape away from Microsoft's mainstay of personal computers to mobile devices. Ballmer, who said he would retire by August, last year revamped Microsoft's organizational structure and agreed to buy Nokia Oyj's handset business for $7.2 billion.
Over the past decade, Microsoft's stock has gained 74 percent including dividends, compared with a 93 percent rise in the Standard & Poor's 500 Index.
Frank Shaw, a spokesman for Microsoft, declined to comment.
Microsoft has had only two CEOs, Gates and Ballmer. In turning to Nadella, the company would get an enterprise-technology veteran who joined Microsoft in 1992 and has had leadership roles in cloud services, server software, Internet search and business applications.
As president of Microsoft's server business, Nadella boosted revenue to $20.3 billion in the fiscal year through June, up from $16.6 billion when he took over in 2011. That unit became cloud and enterprise when Ballmer overhauled Microsoft's structure in July to focus the company on devices and services.
Michael Cusumano, a professor at MIT's Sloan School of Management, said Nadella is a good choice given his close ties and strong reputation within Microsoft's huge engineering corps.
"Microsoft is a contentious enough place that you wouldn't want to bring in someone who lacked credibility with the engineers," Cusumano said.
A bigger shift would be if Gates vacates the chairman role that he has held for years, said Daniel Ives, an analyst at FBR Capital Markets. Gates has been chairman since 1981. Going with an insider for CEO would necessitate turning to an outsider for chairman, Ives said.
"If they are going for the CEO who is right down the hall from Steve Ballmer, you've got to give investors a bone," said Ives, who has the equivalent of a hold rating on the stock. "It would obviously be a big change and a historic change but it's obvious Microsoft needs change in terms of strategy in terms of the next leg of growth."
Earlier this month, Gates, 58, who has devoted much of his time to the Bill & Melinda Gates Foundation and charitable efforts, told Bloomberg Television that he will work on philanthropy full time for the rest of his life and contribute part time as a board member of the software maker.
"The board is doing important work right now," said Gates, who created the foundation with his wife in 2000. "The foundation is the biggest part of my time. I put in part-time work to help as a board member. My full-time work will be the foundation for the rest of my life. I will not change that."
If Thompson, 64, takes over as chairman, Microsoft would have a more than 40-year technology executive in the role. Thompson was a longtime IBM executive before joining technology-security company Symantec in 1999. He took the company from $600 million to $6 billion in sales over a decade-long tenure, before stepping down in 2009. Thompson currently runs Virtual Instruments, a San Jose, California-based maker of software that tracks application and hardware performance.
Thompson joined Microsoft's board in 2012 and has asked tough questions of top executives including Ballmer, people familiar with the situation have said. That helped to create an environment that sped Ballmer's decision to retire by this August, the people have said.
The leadership changes would cap a five-month search that has been dogged with difficulties. Thompson, who is heading the CEO search, wrote in a blog post last month that the board planned to complete a search for CEO in the "early part of 2014." He said the board started with more than 100 candidates.
The company considered internal candidates including Executive Vice President Tony Bates and Chief Operating Officer Kevin Turner. External candidates have included former Nokia CEO Stephen Elop, Ford Motor Co. CEO Alan Mulally, Qualcomm Inc. CEO-elect Steve Mollenkopf and Ericsson AB CEO Hans Vestberg, people familiar with the search have said.
Some CEO candidates have declined to be considered or dropped out of the running. Vestberg has said he plans to stay at Ericsson. Mulally took himself out of the running earlier this month.
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