Microsoft has announced that CEO Steve Ballmer will be retiring in the next 12 months.  Translation:  he’ll be leaving the position as soon as a replacement has been found (more details and Ballmer’s email to Microsoft employees here).

In the meantime, Ballmer will continue to serve as Microsoft’s CEO to lead through the next steps of its transformation to a devices and services company that empowers people for the activities they value most.

“There is never a perfect time for this type of transition, but now is the right time,” Ballmer said. “We have embarked on a new strategy with a new organization and we have an amazing Senior Leadership Team. My original thoughts on timing would have had my retirement happen in the middle of our company’s transformation to a devices and services company. We need a CEO who will be here longer term for this new direction.”

So how will all of this play out?

Microsoft’s Board of Directors appointed a special committee tasked to find Ballmer’s replacement.  The special committee will be chaired by John Thompson, the board’s lead independent director, and will include Chairman of the Board Bill Gates, Chairman of the Audit Committee Chuck Noski and Chairman of the Compensation Committee Steve Luczo.  The committee is also working with Heidrick & Struggles International Inc., a leading executive recruiting firm, in considering both external and internal candidates for the position.

Ballmer has been strongly criticized for his recent decisions, especially in allowing Apple and Google to surpass Microsoft in the mobile space.  The company recently underwent a reorganization that aimed to streamline Windows, Windows Phone, Xbox, Surface, Office 365 as well as other products and services, but the efforts have yet to fully pay off.

Ballmer’s last stand

SiliconANGLE CEO and Founder John Furrier stated that the reorganization is the CEO’s last stand in trying to bring life to the company, and though it essentially means admitting defeat in this modern era, it is making a good move in the right direction.  Ross Rubin, principal analyst at Rectile Research stated that the reorganization was a prelude to choosing a successor.

“Microsoft has tremendous assets but the new CEO will need to move Microsoft’s existing franchises such as Windows and Office into a new era of tablets and smartphones while building what’s been a dormant device business outside of Xbox,” Rubin stated.

Looking at the transition alone, Citi analyst Walter Pritchard sees the change in CEO would mean a huge change for the company.  A reorganization was one thing but a new CEO could kill off divisions that the company hasn’t been monetizing in.

“[A] new CEO will likely have broad freedom to make changes to the business, including exiting businesses and returning more capital,” Pritchard stated.

Microsoft investors delighted in the announcement of Ballmer’s retirement as stocks went up in pre-market trading, and nearly eight percent just after the open at $34.86.

Question now is, who will be the next big boss of Microsoft?

ZDnet was able to come up with a list of possible candidates for the CEO position at Microsoft.  The internal short list includes COO Kevin Turner, who lost responsibility for centralized marketing in the reorganization; Executive VP of Marketing Tami Reller, who joined the company in 2001 when Microsoft bought Great Plains Software; Executive VP Tony Bates, who joined Microsoft when it acquired Skype and now serves as the head of business development and evangelism for the company; and Executive VP Satya Nadella, who served different positions in the company over the years and is currently the president of the Server and Tools Business.

As for the external candidates, the list names Nokia CEO Stephen Elop, who served as president of the Microsoft Business Division before becoming Nokia’s CEO, which would make a lot of sense since Nokia and Microsoft now has a good relationship in the mobile market; Former Windows Chief Steven Sinofsky, who left the company for unknown reasons; and Former Juniper CEO Kevin Johnson who previously ran Platforms and Services for Microsoft before joining Juniper as CEO.