Lisa Kasenaar wrote an on-point piece for Bloomberg on the problems associated with high executive compensation at the top banks and the frequent failure for those firms to properly plan for succession. Kasenaar wrote,
The global credit crunch and economic collapse of the past two years exposed pivotal management mistakes at the biggest U.S. banks — from slack risk oversight to multimillion-dollar bonuses for bankers chasing short-term profit.
Lewis’s (refers to Ken Lewis of Bank of America) exit highlights another kind of poor bank stewardship: the failure of CEOs and boards of directors to plan for an orderly succession when it’s time for the top person to leave.
Inadequate planning derails a company’s strategy and destroys employee morale, former executives, investors, recruiters and leadership consultants say. In the past four years, disorganized transitions cracked the foundations under some of the world’s biggest financial institutions, including Citigroup, Merrill Lynch & Co., insurance giant American International Group Inc. and Zurich-based UBS AG.
Anyone interested in compensation or succession planning must read the piece.
Borders Group BGP (NYSE), the struggling book retailer, announced today that its CEO, Ron Marshall, has resigned as CEO and director of the firm effective immediately. Marshall was appointed CEO just over a year ago. Borders has been stru
ggling for some time and has been facing increasing pressure from activist investors (Pershing Square Capital). At the same time the company has appointed EVP and Chief Merchandising Officer, Michael
J. Edwards, as the interim CEO. According to a story by Mark Clothier for Bloomberg,
Borders… last reported an annual profit in 2006, has seen revenue drop for the past three years as consumers spent less on books and non-essential items amid declining home values and rising unemployment.
Marshall’s resignation comes after the company announced very disappointing sales news. According to a blog story in The New York Times,
Last week, the company announced a nearly 14 percent decline in sales over the 11-week holiday period ending Jan. 16, compared with same period last year. The company was also forced to issue a statement denying rumors that it had extended the time it took to pay bills to small publishers.
Rumors abound that Marshall’s comes as he is about to take a new CEO position.The interim CEO has a very difficult task ahead of him. Edwards has extensive retail experience but he has never faced a more daunting task than the problems currently faced by Borders. The search for a new CEO will need to find a possible miracle worker.
Cloud computing will be one of three major trends in the IT services space for 2010, along with mobile computing, and offshoring and outsourcing, according to Global Equities Research Co-founder Trip Chowdhry. The thread connecting all three of these initiatives is simple: the Internet.
“The underlying building block is going to be Internet. When I talk about Internet, it means universal access from any device, anywhere, anytime, always on, always available,” Chowdhry said. “That is the difference in 2010, I would say, between the next decade and the prior decade.”
The analyst’s forecasts also include a new segmentation of the IT services market, which he says will develop a “consumer-centric” model and an “enterprise-centric” model, feeding into another 2010 trend: the consumerization of the enterprise.
“What [this] means is the best technologies, the best products, the best innovations that are happening in the consumer side of the technology would find their way into the enterprise. For example, technology similar to social networking will emerge into what they will call an ‘enterprise networking’ or ‘enterprise partner management,’” said Chowdhry, who also cites Twitter as another technology that will be used to manage enterprise knowledge. “And then technologies like smartphones will find their way into the enterprise. So there will be a very exciting time in 2010, but the players will be different.”
Who will be at the forefront of this movement? For the cloud application delivery, Chowdhry cites Google (GOOG), VMware (VMW), Salesforce.com (CRM) and Microsoft (MSFT) as the probably leaders. Meanwhile, Sybase (SY) will most likely lead the mobile enterprise subcategory.
The emergence of a new field of diagnostics is changing the way both patients and doctors view pre-treatment initiatives, according to Northland Securities Senior Analyst Stephen D. Simpson. This move to so-called “personalized medicine” may result in increasing opportunities for life sciences companies who research treatments for specialized diseases, and for those larger companies who will wish to acquire them.
“Personalized medicine is the idea that you can use genetic information about a patient to better diagnose and treat them. For example, there is a range in how people will respond to blood thinning drug like Coumadin, and you can predict that through genetic testing,” said Simpson, explaining that such genotype studies could lead to more appropriate prescriptions and dosing recommendations based on a patient’s susceptibility to certain medicines.
“The more we know about patients’ individual conditions, individual diseases, the better you can diagnose them and the better you can fine tune that therapy to get maximum effect and minimum side effects,” he said.
As smaller, more innovative companies in the life sciences space move toward genetic diagnostics and personalized medicine, Simpson predicts the bigger industry names, such as Abbott (ABT), Life Technologies (LIFE) and Millipore (MIL) will be on the prowl for attractive acquisition targets.
“If you have a test, a very good test that has good clinical use but for a relatively small application in terms of patient population, more likely than not you’re going to be acquired,” said Simpson, citing Genzyme (GENZ) and Alexion (ALXN) as two possible acquisition targets going forward.
“I just don’t see those companies staying independent for a particularly long period of time because Wall Street constantly demands growth, constantly demands the new things,” he said. “So many times it’s a path of least resistance to take a lucrative bio bid from a pharmaceutical company or a larger health care company that looks at acquisitions as a way of substituting their own slowing organic growth.”
Yan Zhang, a professor at the Jesse H. Jones Graduate School of Management Rice University and Nandini Rajagopalan from the Department of Management and Organization at the Marshall School of Business University of Southern California have written a fascinating paper entitled, Once an Outsider, Always an Outsider? CEO Origin, Strategic Change and Firm Performance. The authors according to a piece in Cellular- News have put together a,
… study that looked at the tenure and performance history of 193 CEOs in the industrial sector between 1993 and 1998. The researchers found that in the first few years of tenure, there is very little difference between the performances of CEOs promoted from within a company and CEOs hired from the outside. However, in later years, internally promoted CEOs outperformed externally hired CEOs.
“Newly appointed CEOs, both outsiders and insiders, tend to make changes, and it may take years to observe the performance impact of the changes,” Zhang said. “Therefore, the relative advantage or disadvantage between ‘inside’ and ‘outside’ CEOs in initiating and implementing appropriate strategic changes is not seen immediately.”
However, after three years, it’s clear that inside CEOs fare better than outside CEOs, according to Zhang. “When it comes to strategic change, outsiders typically are good at doing the rapid cost cutting and divestment. As tenure increases, obvious opportunities for cost cutting and divestment dry up. Inside CEOs, because of their deep knowledge and root in the firm, are more likely to initiate and implement strategic changes that can build the firm’s long-term competitive advantage,” Zhang said.
After reading the paper, I was not at all convinced by the research results presented by the researchers but anyone interested in key executive changes and what they mean with relation to corporate performance should read the paper.
The ongoing saga at Citigroup continues. Vikram Pandit, who took over as Citigroup’s CEO two years ago, is approaching an imaginary make or break deadline. While Pandit is not responsible for the difficulties Citigroup got itself 
into, his management style and circumstances have not brightened his star as CEO. Throughout his tenure he has been making top management changes and has slowly addressed many of the problems facing the company, he has not, however, appeared to be a take charge executive and has often surrounded himself in a cocoon with a small group of close executives. According to a story by Eric Dash in today’s New York Times,
“We have made enormous progress in 2009,” Mr. Pandit said on Tuesday. The question is whether Citigroup and its leader are progressing quickly enough to satisfy restive employees and shareholders. Even some Citigroup executives say privately that they are worn out after a seemingly endless stream of late-night calls, emergency meetings and management turmoil.
… Given that showing, Mr. Pandit is under pressure to prove that the company can finally make money. Prince Walid bin Talal of Saudi Arabia, a major Citgroup shareholder, said last week in an interview with the Fox Business Network that he had told Mr. Pandit that the honeymoon was over. “Now it’s time to deliver,” he said.
The bank announced another terrible quarter the other day. while numbers were not a surprise, time is no longer on Mr. Pandit’s side.
For more:
The over-riding trend in the industrial equipment sector is one that should be carefully monitored by investors interested in this space.
“I think what is baked into the stocks at the moment is optimism; the worst is over. We’re going to generally start to see revenue growth start to accelerate from here, and I think you are already starting to see that in a lot of the stocks out there right now,” said Edward Borland, managing director and senior research analyst at Next Generation Equity Research, LLC. Borland sees a cloud of unpredictability and a lack of visibility hovering over some of the higher valuations in this space.
“I think in my conversations with various management teams, there is certainly some guarded optimism, but there is also real lack of visibility on the pace of this recovery. Stock valuations reflect a real bullish outlook for 2010, but company commentary does not quite match this euphoria,” he said.
Gardner Denver (GDI), Albany International (AIN) and A.O. Smith (AOS) are three firms Borland favors in this environment, citing all as companies that have undergone significant restructuring and cost-saving initiatives throughout the economic downturn.
“So if you don’t get any improvement in market conditions, earnings are still going to improve, and you can have reasonable confidence in the numbers,” Borland said. “If market conditions do improve, you’ve got a ton of operating leverage in the model and earnings are going to show substantial improvement.”
The analyst contrasts these names with many of the sector’s higher-valued stocks, which risk a bumpy near term if growth does not ramp up as expected by some investors.
“People are right now valuing companies on 2011, even throwing out 2010 and thinking, ‘Okay, 2011 will definitely be a normal year, so let’s value stocks on that.’ That’s the kind of mentality reflected in these valuations,” Borland said. “You could see some significant downside to some of these stocks if growth stays pretty sluggish.”
The following is an excerpt from TWST‘s interview with Michael French, senior vice president of equity research at Morgan Joseph & Co., and Tom Gallagher, managing director of the same. Both specialize in the fields of aerospace and defense, and lend TWST their thoughts on M&A activity within the sector.
TWST: Are we going to see much M&A activity?
Mr. Gallagher: We are not seeing a lot of M&A. I’m disappointed to say that within the past year, at least in the defense industry, M&A transactions are off 90%. I think the relevant numbers are 154 transactions in 2007 compared with 14 transactions in 2009. I think the modest M&A activity that we are observing is very revealing, however. I would just point to a couple of areas which I think are significant: The divestiture of Northrop’s (NOC) technical services division, what they call TASC, and its purchase by a knowledgeable private equity firm tells you how important serving the intelligence community has become because that business covers everything from signals intelligence to training analysts. It’s a very, very deep column in the intelligence community and an asset that was highly sought-after. The valuation was very attractive. Most significantly, the transaction was easily financed at a time when it’s been very hard to finance transactions at all.
The second example: The appeal of government markets must have influenced Mrs. Burns at Xerox (XRX) when she decided to buy Affiliated Computer Services (ACS). This is a story that’s not received much attention – the amount of work ACS performs for government customers, and how large a share of its profits depends upon the government service space, an amount disproportionately greater than its revenue. I really admire what she is doing, and I wish her well because with Minolta on one side and and Cannon on the other, a large share of government contracts can help manage the competitive onslaught.
TWST: Mr. French, what are your thoughts on the M&A situation?
Mr. French: Tom is right. It hasn’t been as robust as is typical. And one of the reasons that he mentioned is that financing has been an issue. Another issue is that sellers’ expectations have been really high. They were based on previous years’ multiples, and they’re thinking they’re going to get 10 to 15 times EBITDA when buyers are thinking more like seven to 10 times EBITDA. But lately I think what we have seen is the sellers’ expectations have come into line with reality. At L-3′s (LLL) recent analyst day, they were anticipating very significant turnaround in the M&A picture in the near term, and there are a couple of reasons for that. One is what I mentioned about the sellers’ expectations coming down, and the other is they’re thinking that in the first quarter some of the larger companies will start disposing off some units that don’t really fit in with what they’re doing. For example, FLIR (FLIR) recently sold their data systems division. I think a combination of those factors is going to start to propel more M&A activity. That said, it’s always a part of the industry. Cadence (CDNS) is one good example, where they have a bunch of really smart engineers, they decide that they could do a better job on their own, and maybe they start up in a small office park or in a garage or something, but they come up with some mousetraps that’s better than any other mousetrap out there. And they start building and building and building, and then they get to a point where they sell to one of the larger companies. And that’s something that I’ve seen in this space throughout my career. It’s part and parcel of the way this community works. So I think there are going to be fast cycles and slow cycles, but there will always be an element of this space.
The following is an excerpt from TWST‘s interview with Charlie Mills, a UK-based managing director at Credit Suisse.
TWST: Looking specifically at Cadbury and Nestle, how have their candy sales held up during the recession?
Mr. Mills: Candy does very well in a recession. It’s basically viewed, if you like, as a cheap treat. A quick candy bar, a Milky Way bar, Mars bar or Snickers always makes you feel a little bit better. It’s a sufficiently low-priced item that is not particularly price sensitive, which is certainly true of the developed world. There is no real indication from what we have seen, or if you go back historically, there has never been any indication of confectionery suffering in economically tough times.
TWST: If you look at Nestle as a whole, how have their candy brands performed in comparison to their other brands? Is that an area of growth for them right now?
Mr. Mills: That depends on the time frame you’re talking about, actually. Traditionally, Nestle (NSRGY.PK)’s mantra is that it is a health, wellness and nutrition company. They really got into actual confectionery meaningfully back in about 1988, I think it was when they bought Rowntree. Since then, confectionery has actually been quite a problem area for them. It’s not been in decline, but if you look at the organic growth of confectionery, it’s been rather low by their own high standards that you see in the rest of the business.
TWST: What are the cost pressures on candy companies right now?
Mr. Mills: Well, actually pricing is quite good. I mean, principal inputs are milk and coco. Milk prices, as you’re probably aware, went ballistic 12 to 18 months ago. They went from $2,000 to $5,000 a ton and back again. So there was a substantial amount of pressure. Coco prices are still very high. So there has been quite a bit of inflation in that business, which the confectioneries would like to pass on. But they are pretty good with their pricing generally
The following is an excerpt from TWST‘s interview with Michael Pachter, managing director and equity research analyst at Wedbush Securities, where he provides coverage of the entertainment software, entertainment retail, and movies and entertainment sectors.
TWST: What are your favorite names in the video game space and why?
Mr. Pachter: The group has gotten just crushed this past year because as we had a decline in sales, I think investors tried to rationalize the decline as being evidence that we actually are seeing a secular decline in interest in video games. And I don’t believe that to be true, but the investment community does. So we’ve seen multiples for the group that have always been a premium to the market multiple – the S&P 500 multiple – decline to a discount of about 25% to the market multiple. We’ve always seen these guys trade at 25% to 50% above the market multiple. I think that as soon as investors figure out that I’m right and that growth is coming back, and that growth is sustainable, you’ll see multiples in the group expand dramatically. They will literally go from about 11x forward earnings, which is a discount of 25%, to call it 18x, which is a premium of about 20%. And that’s more than 50% appreciation. I think the whole group is going up 50%, so it’s kind of hard to have any of the stocks that I don’t like. I think the ones that will move first and farthest are the guys that actually show earnings growth, and that’s very clearly going to be Activision (ATVI); less clearly, Electronic Arts (ERTS), but I think they’ll do it; and less clearly, Ubisoft (UBSFY), but I think they’ll do it. It’s not clear that you’ll get earnings growth out of Take-Two (TTWO). They’ve already guided to a loss next year, so I don’t think that’s moving up on fundamentals any time soon. In terms of THQ (THQI), it’s not clear if they are going to grow earnings either, so I don’t think it’s going to trade up as much as the others. But I think the rising tide will lift all of them.
TWST: Any particular laggards?
Mr. Pachter: Nintendo’s (NTODY.PK) a little bit challenged because people are still trying to make sense out of this whole decline in casual game sales, and attach rates have been poor. The DS, I think, is just getting old; it’s going to be in its seventh year next year, so it’s kind of hard to believe that that thing keeps going as well. So I think that’s ultimately going to drop. I think the software sales are going to be challenged by iPod Touch games; not 50% declines, but a 5% decline or something. There will be some cannibalization of the market because an iPod Touch is an acceptable alternative for a kid to a DS. So I think Nintendo may remain kind of a laggard for a while. It’s hard to tell what Majesco’s (COOL) going to do.
