Wall Street's new red flag: Management changes
By Chelsea Emery
NEW YORK, Jan 31 (Reuters) - A few months ago, investors didn't pay much attention to corporate executives' comings and goings. But with Wall Street worried about stepping on another accounting land mine after Enron Corp. <ENRNQ.PK> <ENE.N,> the leadership issue has become more important than ever.
Case in point: International Business Machines Corp.'s <IBM.N> announcement on Tuesday that it will replace its chief executive would have raised few eyebrows a month ago because the announcement was widely expected. Only the time was unknown.
But in the wake of Enron's collapse, which closely followed the resignation of Jeff Skilling after serving only six months as chief executive, Wall Street is paying closer attention. IBM shares slumped almost 5 percent after the CEO's succession was disclosed.
"After Enron, people are going back and asking more questions," said Deborah Ohl, a portfolio manager with Ashland Management, which oversees $2 billion in New York. "We look at an abrupt departure as suspect -- a sign of trouble."
Unexpected exits usually signal problems, but there are cases when a new executive is seen as good news, especially for troubled companies. To get to the bottom of the ubiquitous "for personal reasons" departure, fund managers will call the company directly, pore over Wall Street analysts' research or even call company customers to troll for rumors.
Indeed, Ashland's analysts and fund managers are probing IBM's shake-up with calls to market sources after the world's largest computer maker said its current President Samuel Palmisano will replace Chief Executive Louis Gerstner, who is stepping down in March.
Ohl said she is worried that growth is slowing and the change may be the company's way to show Wall Street "it is doing something."
It's a marked contrast to last year. Wall Street yawned when Skilling said in August he was leaving Enron, citing personal reasons. But investors woke up when the energy trader two months later reported its first quarterly loss in more than four years. Accounting problems surfaced and the company filed for bankruptcy protection in December.
"People should've been more curious about the change then, and maybe they will be now," said Crit Thomas, head of growth equities for the Armada Funds.
SOMETIMES GOOD NEWS
Executive changes can also bring good news, fund managers point out. SeeBeyond Technology Corp. <SBYN.O>, a software integration firm, was languishing at about $3 a share in October when the company said Ray Lane, a highly touted former president and chief operating officer at Oracle Corp. <ORCL.O> would become chairman.
Shares surged 38 percent the following day and are up five-fold since the announcement, at $11.
"Lane brought his (large company) expertise to a smaller company," said Alan Loewenstein, co-manager of the John Hancock Technology Fund, who then bought shares of SeeBeyond. "A change can be a positive catalyst."
Good news or bad, money managers say investors should always take note when a top executive quits.
"Management is one of the reasons you buy a company and a resignation is a big signal that something is going on," said Thomas. "It could be accounting or fraud issues or discord within management about what direction to take the company. You don't want that."
Sometimes a departure comes ahead of other corporate news, including poor earnings results or layoffs.
Agilent Technologies Inc. <A.N> said on Nov. 12 that Robert Walker, its chief financial officer and executive vice president, had quit to "explore a range of career possibilities and personal interests."
Three days later, the microchip maker said it would fire 4,000 workers and pushed back hopes of a business recovery for a half year or more.
"Some management changes can signal a corporate overhaul that only becomes clear later," said Thomas.
Telecommunications software and services firm LightBridge Inc. <LTBG.O> said on Jan. 24 that President and Chief Operating Officer Tom Meyer would leave the company "to pursue other opportunities".
The same day, LightBridge said quarterly net earnings plunged to just $931,000 from $12.2 million a year earlier.
FERRETING OUT REASON
To ferret out the underlying reason for a top executive's sudden departure, fund managers turn to Wall Street analysts, call the company or even call customers of the company in question.
When drugmaker Mylan Laboratories Inc. <MYL.N> said in June that its president and chief operating officer as well as its chief financial officer quit because of differences of opinion on matters of corporate culture, fund manager Edward von der Linde called the company, then bought some stock.
"They were taking a direction with profitability that I liked," said von der Linde, who helps manage $2.5 billion for Lord, Abbett & Co.
Thomas of Armada Funds said he generally calls the Wall Street analyst who he thinks has the best contacts in the industry.
"I wouldn't call the company because they wouldn't tell me anything more than in the release," he said. The fund manager said home improvement retailer Home Depot Inc. <HD.N> is on his watch list after the firm said in November that Robert Nardelli would replace co-founder Bernie Marcus as chairman.
"We're seeing a change in command just as the company is starting to run out of unit growth options," said Thomas.
To be sure, sometimes "personal reasons" are exactly that.
AOL Time Warner Inc. <AOL.N> Chief Executive Gerald Levin surprised Wall Street when he said in early December he would retire from the world's largest Internet and media company in May.
Levin explained he had begun thinking about retirement after his son was murdered in 1997 and had put a clause in his employment agreement that let him choose when he could leave, within limits. This was the first time he could exercise that provision, Levin told Reuters.
"Sometimes people just want to go off and watch the sun rise," said von der Linde.
16:34 01-31-02 |
