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UPDATE 1-Microsoft board preparing to name Nadella as CEO -report

SEATTLE, Jan 30 (Reuters) - Microsoft Corp's board is preparing to name internal executive Satya Nadella as the software company's next chief executive, Bloomberg reported on Thursday, citing unnamed sources it said were briefed on the CEO search process.

The board is also considering replacing Chairman Bill Gates, possibly with independent lead director John Thompson, Bloomberg said.

Sources had previously told Reuters that Microsoft was down to a "handful" of candidates, including Nadella, executive vice president of the Cloud & Enterprise group, and Tony Bates, executive vice president of Business Development and Evangelism.

Bloomberg added the Nadella plans had not been finalized. Microsoft declined to comment.

In a blog post on the company's website in December, Microsoft lead independent director John Thompson emphasized the need for a CEO with good tech bona fides and "an ability to lead a highly technical organization and work with top technical talent."

Thompson, who leads the four-member CEO search committee, said at the time he expected the panel to reach a decision "in the early part of 2014."

Some investors have been urging Thompson to consider the CEO role himself. A source close to the board told Reuters that Thompson was not in the frame to lead the company, but did not rule out a senior executive role, such as chairman.

The appointment of a company veteran like Nadella, which follows a months-long search and long flirtation with outsiders such as Ford Motor Co Chief Executive Alan Mulally, could disappoint some investors who were hoping for a more radical transformation at the software giant.

"While many on the Street are now expecting Mr. Nadella to get the CEO spot, we believe filling this position with a core Microsoft insider will disappoint those hoping for a fresh strategic approach (e.g. potential breakup of enterprise/consumer, Xbox spin off) an outside executive could have brought to the table," FBR analyst Daniel Ives said in a research note, adding that innovation and fresh strategies were essential for the company.

"With that said, we believe Mr. Nadella's prior roles in the Online Services Division, Business Division, and most recently as president of the Server and Tools business position him as a strong internal candidate with a broad set of knowledge around Microsoft's massive product portfolio," Ives wrote.

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